Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the companys budgeting practices have been inferior, and at times the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are eager to make a favourable impression on the president and have assembled the information below.

The necklaces are sold to retailers for $10 each. Recent and forecast sales in units are as follows:

January (actual) 23,500 June 57,000

February (actual) 33,000 July 37,000

March (actual) 46,000 August 35,000

April 72,000 September 32,000

May 106,000

The large buildup in sales before and during May is due to Mothers Day. Ending inventories should be equal to 40% of the next months sales in units.

The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% 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 months sales are collected by month-end. 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.

The companys monthly selling and administrative expenses are given below:

Variable:

Sales commissions 4 % of sales

Fixed:

Advertising $ 221,000

Rent 21,500

Wages and salaries 114,400

Utilities 9,800

Insurance 4,400

Depreciation 21,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,800 in new equipment during May and $47,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $16,400 each quarter, payable in the first month of the following quarter. The companys balance sheet at March 31 is given below:

Assets

Cash $ 81,000

Accounts receivable ($33,000 February sales;

$368,000 March sales) 401,000

Inventory 115,200

Prepaid insurance 30,800

Fixed assets, net of depreciation 985,000

Total assets $ 1,613,000

Liabilities and Shareholders Equity

Accounts payable $ 112,800

Dividends payable 16,400

Common shares 870,000

Retained earnings 613,800

Total liabilities and shareholders equity $ 1,613,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.

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.

2. A cash budget. Show the budget by month and in total. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign. Do not leave any empty spaces; input a 0 wherever it is required.)

3. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.

4. A budgeted balance sheet as of June 30.