ACT 2121 Managerial Accounting
Individual Assignment
Question 1 (75 Points)
You have just been hired as a new management trainee by Beauty Galore, a distributor of earring to various
retail outlets located in shopping malls across the country. In the past, the company has done very little in
the way of budgeting and at certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for
the upcoming second quarter in order to show management the benefits that can be gained from an
integrated budgeting program. To this end, you have worked with accounting and other areas to gather the
information assembled below.
The company sells many styles of earrings, but all are sold for the same price - $10 per pair. Actual
sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of
earrings):
January (actual)
February (actual)
March (actual)
April (budget)
May (budget)
June (budget)
July (budget)
August (budget)
September (budget)
20,000
26,000
40,000
65,000
100,000
50,000
30,000
28,000
25,000
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be
on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases are paid for in the
month of purchase; the other half is paid for in the following month. All sales are on credit, with no
discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales
are collected in the month of sale. An additional 70% is collected in the following month, and the
remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions……………. 4% of sales
Fixed:
Advertising…………………….
$200,000
Rent……………………………
$18,000
Salaries………………………...
$106,000
Utilities………………………...
$7,000
Insurance………………………
$3,000
Depreciation…………………...
$14,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new
equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each
quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
Asset
Cash…………………………………………..
Accounts receivable ($26,000 February sales;
$320,000 March sales
Inventory……………………………………...
Prepaid insurance……………………………..
Property and equipment (net)…………………
Total Asset
$346,000
$104,000
$21,000
$950,000
$1,495,000
Liabilities and Stockholders’ Equity
Accounts payable……………………………..
Dividends payable……………………………
Capital stock………………………………….
Retained earnings …………………………….
Total liabilities and stockholders’ equity……..
$100,000
$15,000
$800,000
$580,000
$1,495,000
$74,000
The company maintains a minimum cash balance of $50,000. All borrowing is done at the
beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of
$1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity
we will assume that interest is not compounded. At the end of the quarter, the company would pay the
bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of
$1,000), while still retaining at least $50,000 in cash.
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. (5 Points)
b) A schedule of expected cash collections from sales, by month and in total. (10 Points)
c) A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
(10 Points)
d) A schedule of expected cash disbursements for merchandise purchases, by month and in total.
(10 Points)
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. (20 Points)
3. A budgeted income statement for the three-month period ending June 30. Use the contribution
approach. (10 Points)
4. A budgeted balance sheet as of June 30. (10 Points)
Question 2 (25 points)
The Rogatis Sweater Company produces sweaters under the “Rogatis” label. The company buys raw
wool and processes it into wool yarn from which the sweaters are woven. One spindle wool yarn is
required to produce one sweater. The costs and revenues associated with the sweaters are given below:
Selling price…………………………
Cost to manufacture:
Raw materials:
Buttons, thread, lining………….
Wool yarn……………..………
Total raw materials……………….
Direct labor……………………….
Manufacturing overhead………….
Per Sweater
$30.00
$ 2.00
16.00
18.00
5.80
8.70
Manufacturing profit (loss)
32.50
$ (2.50)
Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has
developed for the wool yarn. The yarn is purchased by other companies for use in production of wool
blankets and other wool products. Since the development of the market for the yarn, a continuing dispute
has existed in the Rogatis Sweater Company as to whether the yarn should be sold simply as yarn or
processed in the Rogatis sweaters. Current cost and revenue data on the yarn are given below:
Selling price…………………………
Cost to manufacture:
Raw materials (raw wool)………...
Direct labor………….……………
Manufacturing overhead….………
Manufacturing profit (loss)
Per Spindle
of Yarn
$20.00
$ 7.00
3.60
5.40
16.00
$ 4.00
The market for sweaters is temporarily depressed, due to unusually warm weather in the western
states where the sweaters are sold. This has made it necessary for the company to discount the selling
price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained
strong, the dispute has again surfaced over whether the yarn should be sold outright rather than
processed into sweaters. The sales manager thinks that the production of sweaters should be
discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a
$4.00 profit. However, the production superintendent does not want to close down a large portion of the
factory. He argues that the company is in the sweater business, not the yarn business, and that the
company should focus on its core strength.
All of the manufacturing overhead costs are fixed and would not be affected even if sweaters
were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor
costs. Materials and direct labor costs are variable.
Required:
1.Would you recommend that the wool yarn be sold outright or processed into sweaters? Support your
answer with appropriate computations and explain your reasoning. (10 points)
2.What is the lowest price that the company should accept for a sweater? Support your answer with
appropriate computations and explain your reasoning. (15 points)