Building Your Skills Case [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]You have just been hired as a new management trainee by EarringsUnlimited, a distributor of earrings to various retail outletslocated in shopping malls across the country. In the past, thecompany has done very little in the way of budgeting and at certaintimes of the year has experienced a shortage of cash. Since you arewell trained in budgeting, you have decided to prepare a masterbudget for the upcoming second quarter. To this end, you haveworked with accounting and other areas to gather the informationassembled below. The company sells many styles of earrings, but allare sold for the same price—$15 per pair. Actual sales of earringsfor the last three months and budgeted sales for the next sixmonths follow (in pairs of earrings): January (actual) 21,000 June(budget) 51,000 February (actual) 27,000 July (budget) 31,000 March(actual) 41,000 August (budget) 29,000 April (budget) 66,000September (budget) 26,000 May (budget) 101,000 The concentration ofsales before and during May is due to Mother’s Day. Sufficientinventory should be on hand at the end of each month to supply 40%of the earrings sold in the following month. Suppliers are paid$4.50 for a pair of earrings. One-half of a month’s purchases ispaid for in the month of purchase; the other half is paid for inthe following month. All sales are on credit. Only 20% of a month’ssales are collected in the month of sale. An additional 70% iscollected in the following month, and the remaining 10% iscollected in the second month following sale. Bad debts have beennegligible. Monthly operating expenses for the company are givenbelow: Variable: Sales commissions 4 % of sales Fixed: Advertising$ 250,000 Rent $ 23,000 Salaries $ 116,000 Utilities $ 9,500Insurance $ 3,500 Depreciation $ 19,000 Insurance is paid on anannual basis, in November of each year. The company plans topurchase $18,500 in new equipment during May and $45,000 in newequipment during June; both purchases will be for cash. The companydeclares dividends of $18,750 each quarter, payable in the firstmonth of the following quarter. The company’s balance sheet as ofMarch 31 is given below: Assets Cash $ 79,000 Accounts receivable($40,500 February sales; $492,000 March sales) 532,500 Inventory118,800 Prepaid insurance 23,500 Property and equipment (net)1,000,000 Total assets $ 1,753,800 Liabilities and Stockholders’Equity Accounts payable $ 105,000 Dividends payable 18,750 Commonstock 900,000 Retained earnings 730,050 Total liabilities andstockholders’ equity $ 1,753,800 The company maintains a minimumcash balance of $55,000. All borrowing is done at the beginning ofa month; any repayments are made at the end of a month. The companyhas an agreement with a bank that allows the company to borrow inincrements of $1,000 at the beginning of each month. The interestrate on these loans is 1% per month and for simplicity we willassume that interest is not compounded. At the end of the quarter,the company would pay the bank all of the accumulated interest onthe loan and as much of the loan as possible (in increments of$1,000), while still retaining at least $55,000 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, bymonth and in total. b. A schedule of expected cash collections, bymonth and in total. c. A merchandise purchases budget in units andin dollars. Show the budget by month and in total. d. A schedule ofexpected cash disbursements for merchandise purchases, by month andin total. 2. A cash budget. Show the budget by month and in total.Determine any borrowing that would be needed to maintain theminimum cash balance of $55,000. 3. A budgeted income statement forthe three-month period ending June 30. Use the contributionapproach. 4. A budgeted balance sheet as of June 30