CASE $8-33$ Master Budget with Supporting Schedules $4$ L$08-2,4$ L$08-4,14$ L$08-8,14$ L$08-9,4$ LO$8-10$

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. Because 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$)$

February $($actual$)$

March $($actual$)$

April $($budget$)$

May $($budget$)$

June $($budget$)$

July $($budget$)$

August $($budget$)$

September $($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.

$20,000$

$26,000$

$40,000$

$65,000$

$100,000$

$50,000$

$30,000$

$28,000$

$25,000$

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 $70\%$ are

collected in the following month, and the remaining $10\%$ are collected in the second month following sale. Bad debts have been

negligible.

Monthly operating expenses for the company are given below:

Variable:

Sales commissions

Fixed:

Advertising

Rent

Salaries

Utilities

Insurance

Depreciation

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:

$4\%$ of sales

$$200,000$

$$18,000$

$$106,000$

$$7,000$

$$3,000$

$$14,000$

Assets

Cash

Accounts receivable $($$$26,000$ February sales; $$320,000$ March sales$)$

Inventory

Prepaid insurance

Property and equipment $($net$)$

Total assets

Liabilities and Stockholders' Equity

Accounts payable

Dividends payable

Common stock

Retained earnings

Total liabilities and stockholders' equity

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 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:

$ $74,000$

$346,000$

$104,000$

$21,000$

$950,000$

$$1,495,000$

$ $100,000$

$15,000$

$800,000$

$580,000$

$$1,495,000$

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 $$50,000.$

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

$4.$ A budgeted balance sheet as of June $30.$