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You have just been hired as a new management trainee by Earrings Unlimited, a distributor of carrings 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 bas 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 a pair Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings...not dollars): January (actual) 21,000 June (budget) 51,000 February (actual) 27,000 41,000 March (actual) August (budget) 29,000 66,000September (budget) 26,000 April (budget) 101,000 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 months. Suppliers are paid $4.50 for a pair ofcarrings. One-half (50%) of a month's purchases is paid for in the month of purchase; the other half (50%) 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% ofa 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. Month operating expenses for the company are given below: Variable Fixed: Sales commissions | 4% of sales Advertising Rent Salaries Utilities Insurancoe $250,000 $23,000 $116,000 $9,500 $3,500 $19,000 tion 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 company's ledger accounts as of March 31 is given below: Assets Cash Accounts receivable ($40,500 from the February sales and $532,500 $492,000 from the March sales) Inventory (26,400 earrings $4.50 a pair) $118,800 $23,500 Prepaid insurance Property and equipment (net) Total Assets $1,753,800 Liabilities and Stockholders' Equity Account payable Dividends payable Common stock Retained earnings $105,000 $18,750 $900,000 $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 the month. The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning ofeach 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 accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while retaining at least $55,000 in cash. Required Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets 1. a. A sales budget by month. b. A schedule of cash collections from sales by month. c. A merchandise purchases budget in units and in dollars by month. d. A.schedule of expected cash disbursements for merchandise purchases by month. 2. A cash budget by month. Determine any borrowing that would be needed to maintain th 3. A budgeted income statement for the three-month period ending June 30. Use the 4. A budgeted balance sheet as of June 30. minimum cash balance of $55,000. contribution approach. Templates are provided for you on the next pages. Master Budget Templates 1.a. Sales Budget: April May June Budgeted unit sales Selling price per unit Total sales 1.b. Schedule of expected cash collections: April May June February sales March sales April sales May sales June sales Total cash collections What would be the Accounts Receivable at June 30th? 1.c. Merchandise purchases budget: April May June Budgeted unit sales Add desired ending inventory Total needs Less beginning inventory Total puchases in units Cost of purchases@$4.50 per unit I.d. Budgeted cash disbursements for merchandise purchases: April May June Accounts payable April purchases May purchases June purchases Total cash payments T What would be the Accounts Payable at June 30h? 2. Cash budget: Earrings Unlimited Cash Budget For the Three Months Ending June 30 May April June Beginning cash balance Add collections from customers (1b) Total cash available Less cash disbursements: Merchandise purchases (ld) Advertising Rent Salaries Commissions (4% of sales) Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: (Interest) Total financing - Ending cash balance Earrings Unlimited Budgeted Income Statement For the Three Months Ending June 30 3. Budgeted income statement: Sales (part 1.a.) Variable expenses: Cost of goods sold ($4.50 * # ofearrings sold) Commissions (4% of sales) Total variable expenses Contribution margin Fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation Total fixed expenses Net operating income Interest expense (part2) Net income 4. Budgeted balance sheet: Earrings Unlimited Budgeted Balance Sheet As of June 30 Assets Cash (part 2) Accounts receivable (look at 1b) Inventory (# of earrings . $4.50) Prepaid Insurance (March 31 balance minus the expense on the Income Statement) Property and equipment, net (March 31 balance plus what you purchased in May and June minus the depreciation on the Income Statement) Total assets and Stockholders' Equity Accounts payable, purchases (look at ld) Dividends payable (will still be $18,750) Common stock (did not change from March 31) Retained earnings (see below) Total liabilities and stockholders' equity Retained earnings, April 1 Add net income (part 3) Less dividends declared Retained earnings, June 30