You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country

Case 9-30 Master Budget with Supporting Schedules

EARRINGS UNLIMITED

Minimum ending cash balance $50,000
Selling price $10

Recent and forecast sales: January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 25,000

Desired ending inventories (percentage 40% of next month's sales)
Cost of earrings 4

Purchases paid as follows: In month of purchase 50% In following month 50% Collection on sales: Sales collected current month 20% Sales collected following month 70% Sales collected 2nd month following 10% Variable monthly expenses: Sales commissions (% of sales) 4% Fixed monthly expenses:
Advertising 200,000
Rent 18,000
Salaries 106,000
Utilities 7,000
Insurance (12 months paid in November) 3,000
Depreciation 14,000
Equipment purchased in May 16,000
Equipment purchased in June 40,000
Dividends declared each quarter 15,000

Balance sheet at March 31:
Assets Cash $74,000
Accounts receivable 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $1,495,000

Liabilities and Stockholders' Equity
Accounts payable $100,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings 580,000
Total liabilities and stockholders' equity $1,495,000

Agreement with Bank:
Borrowing increments $1,000
Interest rate per month 1%
Repayment increments $1,000
Total of interest paid each quarter 100%
Required minimum cash balance $50,000

Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchase, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.XX

Click here for the solution: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets

P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1978, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox's fiscal year, November 30, 2010, are shown below. The inventories are stated at cost before any year-end adjustments.

Finished goods $647,000
Work-in-process 112,500
Raw materials 264,000
Factory supplies 69,000

AND SO ON

a. Prepare the inventory section of Maddox's balance sheet as of November 30, 2010.
b. Without prejudice to your answer to P9-9 (a), assume that the market value of Maddox's inventories is less than cost. Explain how this decline would be presented in Maddox's income statement for the fiscal year ended November 30, 2010.
c. Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2010, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2010. Discuss the impact, if any, that this purchase commitment would have on Maddox's financial statements prepared for the fiscal year ended November 30, 2010.

Click here for the solution: Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets

QwikRepairs has over 200 auto-maintenance service outlets nationwide

E6-7 QwikRepairs has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repairs: Oil change related services represent 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 60% contribution margin ratio. The company’s fixed costs are $16,000 (that is, $80,000 per service outlet).

Instructions
a) Calculate the dollar amount of each type of service that the company must provide in order to break even.
b) The company has a desired net income of $60,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?

Click here for the solution: QwikRepairs has over 200 auto-maintenance service outlets nationwide

Modern Building Supply sells various building materials to retail outlets

Common-Size Statements and Financial Ratios for Creditors

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow

MODERN BUILDING SUPPLY
Comparative Balance Sheet
Assets This Year Last Year
Current assets:
Cash . . . . . . . . . . . . . . . . .. $ 90,000 $ 200,000
Marketable securities . . . . . . . . . . –0– 50,000
Accounts receivable, net . . . .. . . . . 650,000 400,000
Inventory . . . . . . . . . . . . . . . 1,300,000 800,000
Prepaid expenses . . . . . . . . . . . 20,000 20,000
Total current assets . . . . . . . . . 2,060,000 1,470,000
Plant and equipment, net . . . . . . . 1,940,000 1,830,000
Total assets . . . . . . . . .. . . . . $4,000,000 $3,300,000

AND SO ON

Assume that the following ratios are typical of firms in the building supply industry:
Current ratio . . . . . . . . . . . . . . 2.5 to 1
Acid-test ratio . . . . . . . . . . . . . 1.2 to 1
Average age of receivables . . . . . 18 days
Inventory turnover in days . . . . . .. . 50 days
Debt-to-equity ratio . . . . . . . .. . . . 0.75 to 1
Times interest earned . . . . . .. . . . 6.0 times
Return on total assets . . . . . . . . . . 10%
Price-earnings ratio . . . . . . . . . . 9
Net income as a percentage of sales . . . . . 4%

Required:
1. Linden Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following ratios for both this year and last year:
a. The amount of working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average age of receivables. (The accounts receivable at the beginning of last year totalled $350,000.)
e. The inventory turnover in days. (The inventory at the beginning of last year totalled $720,000.)
f. The debt-to-equity ratio.
g. The number of times interest was earned.
2. For both this year and last year (carry computations to one decimal place):
a. Present the balance sheet in common-size form.
b. Present the income statement in common-size form down through net income.
3. From your analysis in (1) and (2) above, what problems or strengths do you see existing in Modern Building Supply? Make a recommendation as to whether the loan should be approved.

Click here for the solution: Modern Building Supply sells various building materials to retail outlets