You are a team of consultants who assist organizations with budgeting, and you provide data

analysis to assist with decision making. You have just been hired as a consultant 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. The organization is also

interested in changing the commission structure to see if they can boost profits. 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$)$:

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\mathrm{.}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:

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

The company plans to purchase $$17,200$ in new equipment during May and $$42,000$ in new

equipment during June; both purchases will be for cash. The company declares dividends of

$$18,200$ each quarter, payable in the first month of the following quarter.

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

The company maintains a minimum cash balance of $$52,000.$ 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 $$1,000),$ while still retaining at least $$52,000$ in cash.

$5.$ What is Earrings Unlimited$$s Quarterly break$-$even point in unit sales and dollar sales using the April, May, June quarter$$s costs and price assumptions?

$6.$ Using the same current quarter$$s cost structure and earring price assumptions from #$5$ above, prepare a CVP graph showing cost and revenue data from zero to $350,000$ earrings. Clearly indicate the break$-$even point on the graph.

$7.$ Using your current cost structure and earring price from $5$ above, if $300,000$ earrings are sold in a the quarter, what would be Earrings Unlimited$$s net operating income $($loss$)?$