You have just been hired as a new management trainee 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. 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): January (actual) 21,800 June (budget) 51,800 February (actual) 27,800 July (budget) 31,800 March (actual) 41,800 August (budget) 29,800 April (budget) 66,800 September (budget) 26,800 May (budget) 101,800 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 $4.90 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 $ 290,000 Rent $ 27,000 Salaries $ 124,000 Utilities $ 11,500 Insurance $ 3,900 Depreciation $ 23,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter. The companys balance sheet as of March 31 is given below: Assets Cash $ 83,000 Accounts receivable ($41,700 February sales; $501,600 March sales) 543,300 Inventory 130,928 Prepaid insurance 25,500 Property and equipment (net) 1,040,000 Total assets $ 1,822,728 Liabilities and Stockholders Equity Accounts payable $ 109,000 Dividends payable 21,750 Common stock 980,000 Retained earnings 711,978 Total liabilities and stockholders equity $ 1,822,728 The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash.

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Salesselected answer correct		$3,306,000selected answer correct
Variable expenses:
Cost of goods soldselected answer correct	1,079,960selected answer correct
Commissionsselected answer correct	132,240selected answer correct
not attempted	not attempted
Selling and administrative expensesselected answer incorrect	not attempted	1,212,200
Contribution marginselected answer correct		2,093,800
Fixed expenses:
Advertisingselected answer correct	870,000selected answer correct
Rentselected answer correct	81,000selected answer correct
Salariesselected answer correct	372,000selected answer correct
Utilitiesselected answer correct	34,500selected answer correct
Insuranceselected answer correct	11,700selected answer correct
Depreciationselected answer correct	69,000selected answer correct
Interest expenseselected answer incorrect	3,510selected answer incorrect
not attempted	not attempted	1,441,710
not attempted		652,090
not attempted		not attempted
not attempted		652,090

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