You have just been hired as a new management trainee by Bahrain Company, 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.

Required:

You are required to prepare a master budget in excel file for the three-month period ending June 30. Include the following detailed:

A sales budget, by month and in total.

A schedule of expected cash collections, by month and in total.

A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

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 $59,000.

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

A budgeted balance sheet as of June 30.

In preparing your answers in the excel file you should generally design the excel file to include the following sheets:

Budget launch page (content page)

Beginning balance budget

Budgeting assumptions

Sales budget

Schedule expected cash collections

Merchandise purchases budget

Schedule expected cash disbursements

Cash budget

Budgeted income statement.

Budgeted balance sheet.

Relevant explanations of your calculations

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