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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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$16 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) 23,400 June (budget) 53,400 February (actual) 29,400 July (budget) 33,400 March (actual) 43,400 August (budget) 31,400 April (budget) 68,400 September (budget) 28,400 May (budget) 103,400

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 $5.7 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, with no discount, and payable within 15 days. The company has found, however, that 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 $ 370,000 Rent $ 35,000 Salaries $ 140,000 Utilities $ 15,500 Insurance $ 4,700 Depreciation $ 31,000

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

The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 each quarter, payable in the first month of the following quarter.

A listing of the companys ledger accounts as of March 31 is given below:

Assets Cash $ 91,000 Accounts receivable ($47,040 February sales; $555,520 March sales) 602,560 Inventory 155,952 Prepaid insurance 29,500 Property and equipment (net) 1,120,000 Total assets $ 1,999,012 Liabilities and Stockholders Equity Accounts payable $ 117,000 Dividends payable 27,750 Common stock 1,140,000 Retained earnings 714,262 Total liabilities and stockholders equity $ 1,999,012

The company maintains a minimum cash balance of $67,000. 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 $67,000 in cash.

2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance 91,000 752,000 1.166.400 1,438,400 3,356,800 Add collections from customers Total cash available 843,000 1,166,400 1,438,400 3,356,800 Less cash disbursements: 472,530 Merchandise purchases 351,840 367,080 1,191,450 370,000 1.110,000 370,000 370,000 Advertising 35.000 105,000 35,000 35,000 Rent 140,000 420,000 Salaries 140,000 140,000 216,192 51,264 Commissions 65,664 99,264 15.500 15,500 15,500 46,500 Utilities 0 24,500 57,000 81,500 Equipment purchases 0 0 27,750 27,750 Dividends paid Total cash disbursements 1,005,754 1,156,794 1,035,844 3,198,392 9606 (162,754 402,556 Excess of cash available over disbursements 158,408 Financing Borrowings 0 Repayments Interest Total financing S (162,754) 9,606 402,556 S 158,408 Ending cash balance