Case 8-33 Master Budget with Supporting Schedules [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 all are sold forthe same price—$16 per pair. Actual sales of earrings for the lastthree months and budgeted sales for the next six months follow (inpairs of earrings):

January (actual)	22,400	June (budget)	52,400
February (actual)	28,400	July (budget)	32,400
March (actual)	42,400	August (budget)	30,400
April (budget)	67,400	September (budget)	27,400
May (budget)	102,400

The concentration of sales before and during May is due toMother’s Day. Sufficient inventory should be on hand at the end ofeach month to supply 40% of the earrings sold in the followingmonth.

Suppliers are paid $5.20 for a pair of earrings. One-half of amonth’s purchases is paid for in the month of purchase; the otherhalf 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. Anadditional 70% is collected in the following month, and theremaining 10% is collected in the second month following sale. Baddebts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	320,000
Rent	$	30,000
Salaries	$	130,000
Utilities	$	13,000
Insurance	$	4,200
Depreciation	$	26,000

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

The company plans to purchase $22,000 in new equipment duringMay and $52,000 in new equipment during June; both purchases willbe for cash. The company declares dividends of $24,000 eachquarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	86,000
Accounts receivable ($45,440 February sales; $542,720 Marchsales)		588,160
Inventory		140,192
Prepaid insurance		27,000
Property and equipment (net)		1,070,000
Total assets	$	1,911,352
Liabilities and Stockholders’Equity
Accounts payable	$	112,000
Dividends payable		24,000
Common stock		1,040,000
Retained earnings		735,352
Total liabilities and stockholders’ equity	$	1,911,352

The company maintains a minimum cash balance of $62,000. Allborrowing is done at the beginning of a month; any repayments aremade at the end of a month.

The company has an agreement with a bank that allows the companyto borrow in increments of $1,000 at the beginning of each month.The interest rate on these loans is 1% per month and for simplicitywe will assume that interest is not compounded. At the end of thequarter, the company would pay the bank all of the accumulatedinterest on the loan and as much of the loan as possible (inincrements of $1,000), while still retaining at least $62,000 incash.

Required:

Prepare a master budget for the three-month period ending June30. 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 unitsand in dollars. Show the budget by month and in total.

    d. A schedule of expected cash disbursementsfor 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 theminimum cash balance of $62,000.

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

4. A budgeted balance sheet as of June 30.