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): 50,000 20,000 26,000 June (budget) July (budget) 30,000 January (actual) February (actual) March (actual) April (budget) 40,000 August (budget) 28,000 25,000 65,000 September (budget) 100,000 May (budget) The concentration of sales before and during May is due to Mother's 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 month's 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 month's 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 company's 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 21,000 950,000 Property and equipment (net) Total assets $ 1,495,000 Liabilities and Stockholders' Equity Accounts payable $ Dividends payable 100,000 15,000 800,000 580,000 Common stock Retained earnings 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. Prepare a master budget for the three-month period ending June 30 that includes 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 $50,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Earrings Unlimited Cash Budget For the Three Months Ending June 30 April June Quarter $ 74,000 Beginning cash balance $ 74,000 Add collections from customers 436,000 695,000 865,000 1,996,000 Total cash available 510,000 695,000 865,000 2,070,000 Less cash disbursements: Merchandise purchases 258,000 318,000 244,000 820,000 Advertising 200,000 200,000 200,000 600,000 Rent 18,000 18,000 18,000 54,000 Salaries 106,000 106,000 106,000 318,000 Commissions 26,000 40,000 20,000 86,000 Utilities 7,000 7,000 7,000 21,000 Equipment purchases 16,000 40,000 56,000 Dividends paid 15,000 15,000 Total cash disbursements 630,000 705,000 635,000 1,970,000 Excess (deficiency) of cash available over disbursements (120,000) (10,000) 230,000 100,000 Financing: Borrowings 0 Repayments Interest 0 0 0 Total financing Ending cash balance $ (120,000) $ (10,000) S 230,000 $ May 0 0 0 100,000