The company sells many styles of earrings, but all are sold for the same price$13 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) 20,600 June (budget) 50,600 February (actual) 26,600 July (budget) 30,600 March (actual) 40,600 August (budget) 28,600 April (budget) 65,600 September (budget) 25,600 May (budget) 100,600

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 $4.30 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. 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 $ 230,000 Rent $ 21,000 Salaries $ 112,000 Utilities $ 8,500 Insurance $ 3,300 Depreciation $ 17,000

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

The company plans to purchase $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 each quarter, payable in the first month of the following quarter.

The companys balance sheet as of March 31 is given below:

Assets Cash $ 77,000 Accounts receivable ($34,580 February sales; $422,240 March sales) 456,820 Inventory 112,832 Prepaid insurance 22,500 Property and equipment (net) 980,000 Total assets $ 1,649,152 Liabilities and Stockholders Equity Accounts payable $ 103,000 Dividends payable 17,250 Common stock 860,000 Retained earnings 668,902 Total liabilities and stockholders equity $ 1,649,152

The company maintains a minimum cash balance of $53,000. 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 $53,000 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 $53,000.

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