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$10 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)	20,000	June (budget)	50,000
February (actual)	26,000	July (budget)	30,000
March (actual)	40,000	August (budget)	28,000
April (budget)	65,000	September (budget)	25,000
May (budget)	100,000

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 $4 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	$	200,000
Rent	$	18,000
Salaries	$	106,000
Utilities	$	7,000
Insurance	$	3,000
Depreciation	$	14,000

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

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

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

Assets
Cash	$	74,000
Accounts receivable ($26,000 February sales; $320,000 March sales)		346,000
Inventory		104,000
Prepaid insurance		21,000
Property and equipment (net)		950,000
Total assets	$	1,495,000
Liabilities and Stockholders Equity
Accounts payable	$	100,000
Dividends payable		15,000
Common stock		800,000
Retained earnings		580,000
Total liabilities and stockholders equity	$	1,495,000

The company maintains a minimum cash balance of $50,000. 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 $50,000 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.

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

^^^Label Options:Accounts payable, accounts receivable, accumulated depreciation, administrative expenses, advertising, beginning merchandise inventory, cash, commissions, common stock, depreciation, direct materials, ending merchandise inventory, equipment, indirect materials, insurance, interest expense, inventory, manufacturing overhead, miscellaneous, note payable, prepaid insurance, purchases, rent, retained earnings, salaries, sales, selling and adminstrative expenses, utilities

) Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 65,000 100,000 50,000 Add: Desired ending merchandise inventory 40,000 20,000 12,000 Total needs 105,000 120,000 62,000 Less: Beginning merchandise inventory 26,000 40,000 20,000 Required purchases 79,000 80,000 42,000 201,000 Unit cost $ 4 $ $ $ 4 Required dollar purchases $ 316,000 $ 320,000 $ 168,000 $ 804,000 4 4 Quarter June 50,000 865,000 915,000 Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May Beginning cash balance $ 74,000 $ 50,000 $ Add collections from customers 436,000 695,000 Total cash available 510,000 745,000 Less cash disbursements: Merchandise purchases 258,000 318,000 Advertising 200,000 200,000 Rent 18,000 18,000 Salaries 106,000 106,000 Commissions 26,000 40,000 Utilities 7,000 7,000 Equipment purchases 0 16,000 Dividends paid 15,000 0 Total cash disbursements 630,000 705,000 Excess (deficiency) of cash available over disbursements (120,000) 40,000 Financing Borrowings 170,000 10,000 Repayments 0 0 Interest 0 0 Total financing 170,000 10,000 Ending cash balance $ 50,000 $ 50,000 $ 244,000 200,000 18,000 106,000 20,000 7,000 40,000 0 635,000 280,000 0 (180,000) (5,300) (185,300) 94.700 Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 3 Variable expenses: Contribution margin Fixed expenses: 2 0 - - - 0 Net operating income Interest expense Net income