My apologies

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$15 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)	21,000	June (budget)	51,000
February (actual)	27,000	July (budget)	31,000
March (actual)	41,000	August (budget)	29,000
April (budget)	66,000	September (budget)	26,000
May (budget)	101,000

The concentration of sales before and during May is due to Mothers 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 $4.5 for a pair of earrings. One-half of a months 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 months 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	$	250,000
Rent	$	23,000
Salaries	$	116,000
Utilities	$	9,500
Insurance	$	3,500
Depreciation	$	19,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.

A listing of the companys ledger accounts as of March 31 is given below:

Assets
Cash	$	79,000
Accounts receivable ($40,500 February sales; $492,000 March sales)		532,500
Inventory		118,800
Prepaid insurance		23,500
Property and equipment (net)		1,000,000
Total assets	$	1,753,800
Liabilities and Stockholders Equity
Accounts payable	$	105,000
Dividends payable		18,750
Common stock		900,000
Retained earnings		730,050
Total liabilities and stockholders equity	$	1,753,800

The company maintains a minimum cash balance of $55,000. 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 $55,000 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.

Sales Budget
	April	May	June	Quarter
Budgeted unit sales	66,000	101,000	51,000	218,000
Selling price per unit	$15	$15	$15	$15
Total sales	$990,000	$1,515,000	$765,000	$3,270,000

b.	A schedule of expected cash collections from sales, by month and in total.

Earrings Unlimited
Schedule of Expected Cash Collections
	April	May	June	Quarter
February sales	$40,500			$40,500
March sales	430,500	61,500		492,000
April sales	198,000	693,000	99,000	990,000
May sales		303,000	1,060,500	1,363,500
June sales			153,000	153,000
Total cash collections	$669,000	$1,057,500	$1,312,500	$3,039,000

c.	A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)

Earrings Unlimited
Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted unit sales	66,000	101,000	51,000	218,000
Add: Desired ending merchandise inventory	40,400	20,400	12,400	12,400
Total needs	106,400	121,400	63,400	230,400
Less: Beginning merchandise inventory	26,400	40,400	20,400	26,400
Required purchases	80,000	81,000	43,000	204,000
Unit cost	$4.5	$4.5	$4.5	$4.5
Required dollar purchases	$360,000	$364,500	$193,500	$918,000

d.	A schedule of expected cash disbursements for merchandise purchases, by month and in total.

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
Accounts payable	$105,000			$105,000
April purchases	180,000	180,000		360,000
May purchases		182,250	182,250	364,500
June purchases			96,750	96,750
Total cash payments	$285,000	$362,250	$279,000	926,250

2.	A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
	April	May	June	Quarter
Beginning cash balance	$79,000	$55,150	$272,800	$79,000
Add collections from customers	669,000	1,057,500	1,312,500	3,039,000
Total cash available	748,000	1,112,650	1,585,300	3,118,000
Less cash disbursements:
Merchandise purchases	285,000	362,250	279,000	926,250
Advertising	250,000	250,000	250,000	750,000
Rent	23,000	23,000	23,000	69,000
Salaries	116,000	116,000	116,000	348,000
Commissions	39,600	60,600	30,600	130,800
Utilities	9,500	9,500	9,500	28,500
Equipment purchases		18,500	45,000	63,500
Dividends paid	18,750			18,750
Total cash disbursements	741,850	839,850	753,100	2,334,800
Excess of cash available over disbursements	6,150	272,800	832,200	783,200
Financing:
Borrowings	49,000			49,000
Repayments			(49,000)	(49,000)
Interest			(1,470)	(1,470)
Total financing	49,000	0	(50,470)	(1,470)
Ending cash balance	$55,150	$272,800	$781,730	$781,730

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

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Sales		$3,270,000
Variable expenses:
Cost of goods sold	981,000
Commissions	130,800
		1,111,800
		2,158,200
Fixed expenses:
Advertising	750,000
Rent	69,000
Salaries	348,000
Utilities	28,500
Insurance	10,500
Depreciation	57,000
		1,263,000
Net operating income		895,200
		895,200

4. A budgeted balance sheet as of June 30.

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property and equipment, net
Total assets	$0
Liabilities and Stockholders Equity
Accounts payable, purchases
Dividends payable
Common stock
Total liabilities and stockholders equity	$0

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Sales		$
Variable expenses:
Cost of goods sold	$
Commissions	$
Fixed expenses:
Advertising	$
Rent	$
Salaries	$
Utilities	$
Insurance	$
Depreciation	$
Net Operating Income		$

4. A budgeted balance sheet as of June 30.

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property and equipment, net
Total assets	$0
Liabilities and Stockholders Equity
Accounts payable, purchases
Dividends payable
Common stock
Total liabilities and stockholders equity	$0