Case: Earrings Unlimited You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earings to various retail outlets located in shopping malls across the country. In the pastthe 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 earings, but all are sold for the same price$10 per pair. Actual sales ofearrings forthe last three months and budgeted sales for the next six months follow (in pairs of earings): January (actual) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget) 30,000 March (actual) 40,000 August (budget) 28.000 April (budget) 65,000 September (budget) 25,000 May (budget) 100,000 The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be onhand at the end of each month to supply 40% of the earings sold in the following month. Suppliers are paid $4 for a pair of earings. One-half of a month's purchases is paid for in the month of purchase; the other halfis 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: Assets Cash 74,000 Accounts receivable ($26,000 February sales; 346,000 $320,000 March sales) 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 Common stock 800,000 Retained eamings 580,000 Total liabilities and stockholders' equity $1.495.000 The company maintains a minimum cash balance of $50.000. All borowing is done at the beginning of a month; any repayment are made at the end of a month. The company has an agreement with a bank that allows the company to borrowin 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: 1.4. A sales budget, kymorth 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 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 $50,000. 3. A budgeted income statement for the thre-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30