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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$16 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) 22,400 28,400 42,400 67,400 102,400 June (budget) July (budget) August (budget) September (budget) 52,400 32,400 30,400 27,400 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 $5.20 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. 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 $ 320,000 $ 30,000 $ 130,000 $ 13,000 $ 4,200 $ 26,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $22,000 in new equipment during May and $52,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $24,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 86,000 Assets Cash Accounts receivable ($ 45, 440 February sales; $542,720 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity 588, 160 140,192 27,000 1,070,000 $ 1,911,352 $ 112,000 24,000 1,040,000 735,352 $ 1,911,352 The company maintains a minimum cash balance of $62,000. 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 $62,000 in cash. 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 $62,000. 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. TUI IC ICC VIUILIS Lunny Jun JV May June Quarter $ X.584 $ $ 3X8.552 Beginning cash balance Add collections from customers April 86,000 $ 736,000 822,000 20968 1,422,400 1,632,368 1,150,400 1,212,984 3,308,800 Total cash available 3,667,352 Less cash disbursements: Merchandise purchases Advertising 499 400 320,000 Rent 30,000 423,280 320,000 30,000 130,000 43,136 13,000 230,880 320,000 30,000 130,000 33,536 Salaries Commissions 130,000 65,536 13,000 22,000 1,082,640 960,000 90,000 390,000 142,208 39,000 74,000 24,000 2,801,848 865,504 Utilities 13,000 0 52,000 0 0 24,000 983,416 (161,416) 1,009,016 203,968 809,416 822,952 Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance $4,000 22000 224,000 224,000 6,720 454,720 410,784 0 6,720 230,720 592,232 224,000 62,584 $ $ 203,968 $ $ Budgeted Income Statement For the Three Months Ended June 30 Sales $ 3,555,200 Variable expenses: Purchases 1,062640 Commissions 142,208 1,224,848 2,330,352 Contribution margin Fixed expenses: Advertising 960,000 Rent 90,000 Salaries Utilities 390,000 39,000 12,600 78,000 Insurance Depreciation 1,569,600 760,752 Net operating income Interest expense Net income 754,032 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash $ 316,884 834,560 Accounts receivable 67,392 Inventory Prepaid insurance Property and equipment, net 14,400 1,060,000 Total assets $ 2,399,136 $ Liabilities and Stockholders' Equity Accounts payable Dividends payable 24,000 Common stock 1,040,000 Retained earnings *4,032 Total liabilities and stockholders' equity $ 1,818,032