COURSE PROJECT 1 INSTRUCTIONS

You have just been contracted as a new management trainee byEarrings Unlimited, a distributor of earrings to various retailoutlets across the country. In the past, the company has done verylittle in the way of budgeting and at certain times of the year hasexperienced a shortage of cash.

Since you are well trained in budgeting, you have decided toprepare a master budget for the upcoming second quarter. To thisend, you have worked with accounting and other areas to gather theinformation assembled below.

The company sells many styles of earrings, but all are sold forthe same price - $10 per pair. Actual sales of earrings for thelast three months and budgeted sales for the next six monthsfollow:

January (actual)	20,000
February (actual)	26,000
March (actual)	40,000
April (budget)	65,000
May (budget)	100,000
June (budget)	50,000
July (budget)	30,000
August (budget)	28,000
September (budget)	25,000

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 bracelets sold in the followingmonth.

Suppliers are paid $4 for each bracelet. One-half of a month'spurchases is paid for in the month of purchase; the other half ispaid for in the following month. All sales are on credit with nodiscounts. The company has found, however, that only 20% of amonth's sales are collected in the month of sale. An additional 70%is collected 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 given below:

Variable expenses:

Salescommissions                        4% of sales

Fixed expenses:

Advertising                                       $200,000

Rent                                                  $18,000

Salaries                                        $106,000

Utilities                                             $ 7,000

Insurance                                          $3,000

Depreciation                                    $14,000

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

The company plans to purchase $16,000 in new equipment duringMay and $40,000 in new equipment during June; both purchases willbe for cash. The company declares dividends of $15,000 eachquarter, payable in the first month of the following quarter.

Other relevant data is given below:

Cash balance as of September 30                     $74,000

Inventory balance as of September30            $112,000

Merchandise purchases forSeptember           $200,000

The company maintains a minimum cash balance of at least $50,000at the end of each month. All borrowing is done at the beginning ofa month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the companyto borrow the exact amount needed 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 will pay the bank all of the accrued intereston the loan and as much of the loan as possible while stillretaining at least $50,000 in cash.

Required:

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

1.

a. A sales budget, by monthand in total.

b. A schedule of expectedcash collections from sales, by month and in total.

c. A merchandise purchasesbudget in units and in dollars. Show the budget by month and intotal.

d. A schedule of expectedcash disbursements for merchandise purchases, by month and intotal.

2. A cash budget. Show the budget bymonth and in total. Determine any borrowing that would be needed tomaintain the minimum cash balance of $50,000.