EARRINGS UNLIMITED CASE 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 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) 20.000 June (budget) 26.000 July (budget) 40.000 August (budget) 65,000 September (budget) 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 is 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation 200,000 18,000 106,000 7,000 3,000 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: $ 74,000 Assets Cash Accounts receivable ($26.000 February sales: $320.000 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets 346,000 104,000 21,000 950,000 $ 1.495,000 Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings 100,000 15.000 800,000 580,000 Total liabilities and stockholders equity $ 1,495,000 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: 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 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 purchases, by month and in total - A cash budget. Show the budget by month and in total 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach April May June Quarter 50,000 215,000 SALES BUDGET BUDGETED UNIT SALES SELLING PRICE PER UNIT TOTAL SALES 65,000 10 650,000 100,000 10 1,000,000 10 10 500,000 2,150,000 EXPECTED CASH COLLECTIONS TOTAL CASH COLLECTIONS 397,000 635,000 880,000 1,912,000 215,000 12,000 MERCHANDISE PURCHASES BUDGETED UNIT SALES DESIRED ENDING INVENTORY TOTAL NEEDS BEGINNING INVENTORY REQUIRED PURCHASES UNIT COST REQUIRED DOLLAR PURCHASES 65,000 40,000 105,000 26,000 79,000 100,000 20,000 120,000 40,000 80,000 50,000 12,000 62,000 20,000 42,000 86,000 (86,000) 316,000 320,000 168,000 (344,000) BUDGETED CASH DISBURSEMENTS FOR MERCHANSIE PURCHASES ACCOUNTS PAYABLE COLLECTED 100,000 TOTAL CASH PAYMENTS 258,000 318,000 244,000 820,000 74,000 397,000 471,000 635,000 635,000 880,000 880,000 1,912,000 1,912,000 258,000 CASH BUDGET BEGINNING CASH COLLECTIONS TOTAL CASH AVAILABLE CASH DISBURSEMENTS: MERCHANDISE PURCHASES ADVERTISING RENT COMMISSIONS UTILITIES EQUIPMENT PURCHASES DIVIDEND PAID TOTAL CASH DISBURSED EXCESS/(SHORTAGE) OF CASH FINANCING: BORROWINGS REPAYMENTS INTEREST TOTAL FINANCING BUDGETED INCEOM STATEMENT SUB-TOTAL TOTAL SALES VARIABLE EXPENSES: COST OF GOODS SOLD COMMISSIONS TOTAL VARIABLE EXPENSES CONTRIBUTION MARGIN FIXED EXPENSES: ADVERTISING RENT SALARIES UTILITIES INSURANCE DEPRECIATION TOTAL FIXED EXPENSES NET OPERATING INCOME INTEREST EXPENSE NET INCOME