You have just been hired as a new management trainee by Earring5. Untimited, a distributor of earrings to various retail outiets located in shopping mals across the country In the past, the company has done very litte 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 occounting and other areas to gather the information assembied below. The company sells many styles of earrings, but all are sold for the some price-s16 per pair Acrual sales of eamings for the last three months and budgeted sales for the next six months foliow (in pairs of earrings): The concentration of sales before and during May is due to Mother's Day Suffcient inventory should be on hand at the end of each month to supply 40% of the eartings sold in the following month. Supptiers are poid $4.60 for a pair of earrings. One-half of a month's purchases is paid for in me month of purchase, the other half is poid for in the following month. All sales ate on credit. Only 20% s of a month's sales are collected in the month of sale. An odditional 70% is collected in the following month, and the remaining 10k is collected in the second month following sale. Bad debts have been negigible Monthly operating expenses for the company are given below. Insurance is paid on an annual basis, in November of each yeat The company pians to purchase $19,000 in new equipment during May and $46.000 in new equipment during June; both purchases Will be for cash. The company deciares dividends of $19,500 each quartec, payable in the first month of the following quarter. The compary's balance sheet os of March 31 is given below: The compony meintains a minimum cash balance of $56,000. Al boriowing is done at the beginning of a month; any repayments are made at the end of a month The company has an agreement with o bonk that allows the company to borrow in increments of 51,000 at the beginning of each 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 $56,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detalled 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 purehases budget in units and in collars. 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 $56,000 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
