40,800 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. 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 a master budget for the upcoming second quarter. 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-$14 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) 20,800 June (budget) 58,888 February (actual) 26,800 July (budget) 39,800 March (actual) August (budget) 28,888 April (budget) 65,800 September (budget) 25,898 May (budget) 100,800 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 $4.40 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase, the other half is pald for in the following month. All sales are on credit. 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 $ 240, eee $ 22,eee Salaries $ 114,000 Utilities $ 9,000 Insurance $ 3,400 Depreciation $ 18,800 Rent Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,000 in new equipment during May and $44,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 78,000 Assets Cash Accounts receivable ($37,520 February sales; $456,960 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings 494, 480 115,808 23, see 990,000 $ 1,701,288 $ 104,000 18, cee 880, eee 699, 288 Total liabilities and stockholders' equity $ 1,701, 288 The company maintains a minimum cash balance of $54,000. 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 $54,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: 1. a. A sales budget, by month and in total. b. A schedule of expected cash collections, 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 purchases, 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 $54,000. 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. Prepare a master budget for the three-month period ending June 30 that includes a sales budget, by month June Quarter Budgeted unit sales Selling price per unit Total sales Sales Budget April May 65.800 100.800 14 S 14 921,200 s 1.411.200 50.800 $ S 14 S 217,400 14 3,043,600 $ S 711,200 s Earrings Unlimited Quarter S 37,520 February sales Schedule of Expected Cash Collections April May June S 37,520 0 0 399,840 57,120 0 184.240 644,840 92,120 0 282.240 987,840 0 0 142,240 S 621,600 S 984,200 $ 1,222,200 March sales April sales May sales June sales Total cash collections 456,960 921,200 1,270,080 142.240 S 2.828.000 Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable $ 104,000 S 0 S 0 $ 104,000 April purchases 175,560 175,560 0 351,120 May purchases 0 177.760 177.760 355,520 June purchases 0 0 94,180 94.160 Total cash payments $ 279,560 $ 353,320 S 271,920 904.800 June 225,624 1.222.200 1.447.824 Quarter S 78,000 2,828,000 2.906.000 904,800 271.920 240.000 22.000 114.000 Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May Beginning cash balance S 78,000 $ 54,192 Add collections from customers 621,600 984,200 Total cash available 699,600 1.038.392 Less cash disbursements: Merchandise purchases 279,560 353,320 Advertising 240.000 240.000 Rent 22.000 22.000 Salaries 114,000 114,000 Commissions 36.848 56,448 Utilities 9.000 9,000 Equipment purchases 0 18,000 Dividends paid 18.000 0 Total cash disbursements 719,408 812.768 Excess (deficiency) of cash available over disbursements (19,808) 225.624 Financing: Borrowings 74,000 0 Repayments 0 0 Interest 0 0 Total financing 74.000 0 Ending cash balance S 54,192 $ 225,624 720.000 68,000 342.000 121.744 27,000 28,448 9,000 44,000 62,000 18,000 0 729,368 718,456 2.261,544 644,456 0 (74.000) (2.220) (76.220) 642.236 74.000 (74,000) (2.220) (2.220) 642,236 $ S Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 $ 3,043,600 Sales Variable expenses Commissions 121.744 Cost of goods sold 121.744 2.921,856 Contribution margin Fixed expenses: Insurance Advertising Depreciation Rent 10.200 720.000 54,000 Salaries 66.000 342.000 27.000 Utilities 1,219,200 1.702,656 Net operating income Interest expense Net income 1,702,658 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Inventory Accounts receivable Cash Prepaid insurance Property and equipment, net $ 0 Total assets Liabilities and Stockholders' Equity Accounts payable Common stock Dividends payable Retained earnings Total liabilities and stockholders' equity $ 0