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You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings

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 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 different styles of earrings, but all are sold for the same price $-$ $$13$ per pair.

Actual sales of earrings for the last three months and budgeted sales for the next six months follows

$($in pairs of earrings$)$:

January $($actual$)20,600$ June $($budget$)50,600$

February $($actual$)26,600$ July $($budget$)30,600$

March $($actual$)40,600$ August $($budget$)28,600$

April $($budget$)65,600$ September $($budget$)25,600$

May $($budget$)100,000$

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.

Suppliers are paid $$4\mathrm{.}30$ for a pair of earrings. One$-$half of a month's purchases are paid for in the

month of purchase; and $50\%$ is paid for in the second month. Receivables are collected in the

following order $-20\%$ in the month of sale; $70\%$ in the month following the sale; and $10\%$ in the

second month following the sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:

Sales commissions $4\%$ of sales

Fixed:

Advertising $$230,000$

Rent $$21,000$

Salaries $$112,000$

Utilities $$8,500$

Insurance $$3,300$

Depreciation $$17,000$

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

The company plans to purchase $$17,500$ in new equipment during May and $$43,000$ in new

equipment during June: both purchases will be made with cash. The company declares

dividends of $$17,250$ each quarter, payable in the first month of the following quarter.

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

Assets

Cash $$77,000$

Accounts Receivable $($$$34,580$ Feb sales; $$422,240$ Mar sales$)456,820$

Inventory $112,832$

Prepaid Insurance $22,500$

Plant and Equipment $($net$)$

Buildings and equipment $$980,000$

Accumulated depreciation $-$

Plant and equipment, net $980,000$

Total Assets $$1,649,152$

Libilities and Stockholders' Equity

Accounts Payable $$103,000$

Dividends Payable $17,250$

Stockholers' equity:

Common Stock $$860,000$

Retained earnings $668,902$

Retained Earnings $1,528,902$

Total Liabilities and Stockholders' Equity $$1,649,152$

The company maintains a minimum cash balance of $$53,000.$ 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 the accumulated interest on the loan and as much of the loan as possible $($in

increments of $$1,000),$ while still retaining at least $$53,000$ in cash.

Required:

$2.$ 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 $$53,000.$

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

contribution approach.

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

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