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$)20,000$ June $($budget$)50,000$

February $($actual$)26,000$ July $($budget$)30,000$

March $($actual$)40,000$ August $($budget$)28,000$

April $($budget$)65,000$ September $($budget$)25,000$

May $($budget$)100,000$

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. 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:

Variable:

Sales commissions $4\%$ of sales

Fixed:

Advertising $ $200,000$

Rent $ $18,000$

Salaries $ $106,000$

Utilities $ $7,000$

Insurance $ $3,000$

Depreciation $ $14,000$

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

Capital Expenditures:

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.

Chapter $8$ Budget Exercise $$ Earrings Unlimited page $2$ of $2$

The company$$s balance sheet as of March $31$ is given below:

Assets

Cash $ $74,000$

Accounts receivable

$($$$26,000$ February sales; $$320,000$ March sales$)346,000$

Inventory $104,000$

Prepaid insurance $21,000$

Property and equipment $($net$)950,000$

Total assets $ $1,495,000$

Liabilities and Stockholders$$ Equity

Accounts payable $ $100,000$

Dividends payable $15,000$

Common stock $800,000$

Retained earnings $580,000$

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 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:

Prepare a master budget for the three$$month period ending June $30.$ Include the following detailed

schedules:

$1.$ a$.$ A sales budget, by month and in total.

b$.$ A schedule of expected cash collections, 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. Determine any borrowing that would be

needed to maintain the minimum cash balance of $$50,000.$

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

approach.

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