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$19 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)	24,000	June (budget)	54,000
February (actual)	30,000	July (budget)	34,000
March (actual)	44,000	August (budget)	32,000
April (budget)	69,000	September (budget)	29,000
May (budget)	104,000

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 $6.00 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	$	400,000
Rent	$	38,000
Salaries	$	146,000
Utilities	$	17,000
Insurance	$	5,000
Depreciation	$	34,000

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

The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 each quarter, payable in the first month of the following quarter.

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

Assets
Cash	$	94,000
Accounts receivable ($57,000 February sales; $668,800 March sales)		725,800
Inventory		165,600
Prepaid insurance		31,000
Property and equipment (net)		1,150,000
Total assets	$	2,166,400
Liabilities and Stockholders Equity
Accounts payable	$	120,000
Dividends payable		30,000
Common stock		1,200,000
Retained earnings		816,400
Total liabilities and stockholders equity	$	2,166,400

The company maintains a minimum cash balance of $70,000. 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 $70,000 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 $70,000.

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.

Req 1A Req 1B Req 1C Req 1D Req 2 Req3 Prepare a master budget for the three-month period ending June 30 that includes a Budgeted unit sales Selling price per unit Sales Budget April May 69,000 104,000 | $ 19 $ 19 $1,311,000 $1,976,000 June Quarter 54,000 227,000 $ 19 $ 1,026,000 $ 4,313,000 19 Total sales Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash collections, by month and in total. $ Earrings Unlimited Schedule of Expected Cash Collections April May June February sales $ 57,000 0 0 March sales 585,200 83,6001 April sales 262,200 917,700 131,100 May sales 0 395,200 1,383,200 June sales 0 205,200 Total cash collections | $ 904,400 $ 1,396,500 $ 1,719,500 Quarter 57,000 668,800 1,311,000 1,778,400 205,200 4,020,400 $ Prepare a master budget for the three-month period ending June 30 that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost to 2 decimal places.) Quarter 227,000 Earrings Unlimited Merchandise Purchases Budget April May Budgeted unit sales 69,000| 104,000 Add: Desired ending merchandise inventory 41,600 21,600 Total needs 110,600 125,600 Less: Beginning merchandise inventory 27,600 41,600 Required purchases 83,000 84,000 Unit cost $ 6.00 $ 6.00 Required dollar purchases $ 498,000 $ 504,000 227,000 June 54,000 13,600 67,600 21,600 46,000 6.00 276,000 $ $ 227,000 $ 6.00 $ 1,362,000 Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable $ 120,000 $ 0 $ 0 $ 120,000 April purchases 249,000 249,000 498,000 May purchases 0 252,000 252,000 504,000 June purchases of 0 138,000 138,000 Total cash payments | $ 369,000 $ 501,000 $ 390,000 1,260,000 Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter 000 0 Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising 369,000 400,000 38,000 146,000 501,000 400,000 38,000 146,000 390,000 400,000 38,000 146,000 1,260,000 1,200,000 114,000 Rent Salaries 438,000 Commissions Utilities 17,000 17,000 17,000 51,000 0 970,000 (970,000) 1,102,000 (1,102,000) 991,000 (991,000) 3,063,000 (3,063,000) Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing 0 0 Ending cash balance $ (970,000) 4.102,000) $ (991,000) (3,063,000) Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales $ 4,313,000 Variable expenses: Cost of goods sold Commissions 1,362,000 172,520 1,534,520 2,778,480 Contribution margin Fixed expenses: Advertising Insurance Rent 1,200,000 15,000 114,000 438,000 51,000 102,000 Salaries Utilities Depreciation 1,920,000 858,480 Net operating income Interest expense Net income 858,480 Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts receivable Inventory Prepaid insurance Property and equipment, net 0 Total assets $ Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity | $