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 priceAc€??$13 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)

21,400

  June (budget)

51,400

  February (actual)

27,400

  July (budget)

31,400

  March (actual)

41,400

  August (budget)

29,400

  April (budget)

66,400

  September (budget)

26,400

  May (budget)

101,400

The concentration of sales before and during May is due to MotherAc€?cs 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 $4.7 for a pair of earrings. One-half of a monthAc€?cs 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 monthAc€?cs 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

$

270,000

     Rent

$

25,000

     Salaries

$

120,000

     Utilities

$

10,500

     Insurance

$

3,700

     Depreciation

$

21,000  

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

    The company plans to purchase $19,500 in new equipment during May and $47,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $20,250 each quarter, payable in the first month of the following quarter.

     A listing of the companyAc€?cs ledger accounts as of March 31 is given below:

Assets

  Cash

$

81,000

  Accounts receivable ($35,620 February sales;    $430,560 March sales)

466,180

  Inventory

124,832

  Prepaid insurance

24,500

  Property and equipment (net)

1,020,000

  Total assets

$

1,716,512

Liabilities and StockholdersAc€?c Equity

  Accounts payable

$

107,000

  Dividends payable

20,250

  Common stock

940,000

  Retained earnings

649,262

  Total liabilities and stockholdersAc€?c equity

$

1,716,512

     The company maintains a minimum cash balance of $57,000. 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 $57,000 in cash.

Required:

1.

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

a.

A sales budget, by month and in total.

                                                                     Sales Budget

                                        April                May                  June                     Quarter

Budgeted unit Sales        66,400          101,400              51,400                 219,200

Selling price per unit          13               13                         13                       13

Total sales                       863,200       1,318,200           668,200                 2,849,600

b.

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

                                                     Earrings Unlimited

                                       Schedule of Expected Cash Collections

                                       April                May                   June                    Quarter

February Sales             35,620                                                                   35,620             

March Sales                 376,740           53,820                                           430,560                        

April Sales                    172,640           604,240              86,320                863,200                                                    

May Sales                                             263,640             922,740              1,186,380                                           

June Sales                                                                      133,640              133,640                                  

Total Cash collections   585,000         921,700              1,142,700            2,649,400                                                               

c.

A merchandise purchases budget in units and in dollars. Show the budget by month and in total.(Round unit cost of purchases to 1 decimal place.)

                                                         Earrings Unlimited

                                                Merchandise Purchases Budget

                                                                         April                May                   June                    Quarter

Budgeted Unit Sales                                        66,400           101,400              51,400                219,200                             

Add: Desired ending merchandise inventory   40,560            20,560               12,560               12,560                             

Total Needs                                                   106,960          121,960               63,960              231,760                              

Less: Beginning Merchandise inventory         26,560            40,560                 20,560             26,560                             

Required purchases                                        80,400             81,400               43,400              205,200                             

Unit Cost                                                           4.7                 4.7                      4.7                     4.7           

Required dollar purchases                                377,880          382,580            203,980             964,440                                    

d.

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                                                                                                                     

April Purchases                                                                                                                     

May Purchases                                                                                                                      

June Purchases                                                                                                                                

Total Cash Payments                                                                                                                    

2.

A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

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.

Cost of goods sold @ $4.7 per unit = $1,030,240

Commissions @ 4% of sales = $113,984

Advertising ($270,000 Af— 3) = $810,000

Rent ($25,000 Af— 3) = $75,000

Salaries ($120,000 Af— 3) = $360,000

Utilities ($10,500 Af— 3) = $31,500

Insurance ($3,700 Af— 3) = $11,100

Depreciation ($21,000 Af— 3) = $63,000

Inventory: (12,560 units @ $4.7 per unit) = $59,032

Prepaid insurance: ($24,500 Ac€?o $11,100) = $13,400

Property and equipment, net: ($1,020,000 + $66,500 Ac€?o $63,000) = $1,023,500

Accounts payable, purchases: (50% Af— $203,980) = $101,990

  Accounts receivable at June 30:

     10% Af— May sales of $1,318,200

$

131,820

     80% Af— June sales of $668,200

534,560

     Total

$

666,380

  Retained earnings at June 30:

     Balance, March 31

$

649,262

     Add net income (Part 3)

349,736

     Total

998,998

     Less dividends declared

20,250

     Balance, June 30

$

978,748