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. 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 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 follow (in pairs of earrings):

January (actual)... 20,800 June (budget)... 50,800
February (actual)... 26,800 July (budget)... 30,800
March (actual)... 40,800 August (budget ... 28,800
April (budget)... 65,800 September (budget) 25,800
May (budget)... 100,800

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 $7 for a pair of earrings. One-half of a month's purchases are paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:

Variable:
Sales commissions6% of sales

Fixed:
Advertising$199,200
Rent17,200
Salaries105,200
Utilities6,200
Insurance2,200
depreciation13,200

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

The company plans to purchase $15,400 in new equipment during May and $39,200 in new equipment during June; both purchases will be for cash. The company declares dividends of $11,000 each quarter, payable in the first month of the following quarter.

A listing of the company's ledger accounts as of March 31 is given below:

Assets
Cash$ 130,400
Accounts Receivable($34,840 February sales; $424,320
March Sales) 459,1600
Inventory 184,240
Prepaid insurance 21,800
Property and equipment(net) 861,200
Total Assets $1,656,800

Liabilities and Stockholders Equity
Accounts Payable $177,800
Dividends Payable 11,000
Capital stock 880,000
Retained Earnings 588,000
Total liabilities and stockholders equity $1,656,800

The company maintains a minimum cash balance of $55,000. 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 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 $55,000 in cash.

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

a. A sales budget, by month and in total
b. A schedule of expected cash collections from sales, 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.

1a. Sales Budget

                                         April         May     June         Total

Credit Sales in unit  65,800      100,800     50,800  217,400

Selling Price                   $13           $13          $13            $13

Sales Value        $855,400  $1,310,400 $660,400 $2,826,200

                                         April         May     June         Total

Sales Commission 6% $51,324  $78,624  $39,624   $169,572

1b. Expected Cash Collections:

                                        April         May     June         Total

20% month of sale   $171,080 $262,080 $132,080  $565,240

70% following month 371,280   598,780   917,280    1,887,340

10% second month     34,840     53,040     85,540       173,420

Total                       $577,200 $913,900$1,134,900$2,626,000

1c. Merchandise Purchase Budget

                                       April         May     June         Total

Ending Inventory       40,320     20,320    12,320      12,320

Units Sold                      65,800     100,800   50,800    217,400

Units available              106,120       121,120    63,120   229,720

Beginning Inventory     26,320       40,320   20,320     26,320

Purchases (units)          79,800       80,800   42,800   203,400

Beginning Inventory $184,240  $282,240 $142,240  $184,240

Purchase ($)            $558,600  $565,600 $299,600  $1,423,800

Cost (goods available)$742,840 $847,840 $441,840    $1,608,040

Less Ending Inventory$282,240 $142,240 $86,240   $86,240

Cost of goods sold     $460,600$705,600 $355,600     $1,521,800

1d. Expected Cash Disbursements for Merchandise Purchases:

                                       April         May     June         Total

Purchase ($)        $558,600$565,600 $299,600  

50% 1st month    $279,300$282,800  $149,800   $711,900

50% 2nd month   $177,870   $279,300 $282,800  $739,970

Total Disbursements$457,170 $562,100 $432,600     $1,451,870  

2d. Cash Budget

                                       April         May     June         Total

Beginning Balance$130,400   $55,306    $55,282    $130,400

Cash Collections   $577,200 $913,900 $1,134,900$2,626,000

Cash Disbursements:

Merchandise        ($457,170)  ($562,100) ($432,600)($1,451,870)

Sales Commission($51,324)  ($78,624)  ($39,624)  ($169,572)

Other fixed costs($327,800)  ($327,800) ($327,800)($983,400)*

Equipment purchase                ($15,400)  ($39,200)  ($54,600)

Dividends paid       ($11,000)                                          ($11,000)

Bank Loan            $195,000     $70,000 ($265,000)             $0

Loan Interest          ($2,650)                                          ($2,650)

Minimum balance $55,306     $55,282     $83,308    $83,308

Earrings Unlimited INCOME STATEMENT for the quarter to June 30:

Sales                                            $2,826,200

Cost of goods sold                         1,521,800

Gross Profit                                  $1,304,400

Less: Expenses:

Sales Commission     169,572

Other fixed costs      983,400

Insurance Expenses     6,600

Bank Loan Interest       2,650

Depreciation               39,600 $1,201,822

Net Income                                       $102,578

Retained Earnings b/f                     $588,000

Dividends                                           ($11,000)

Retained Earnings c/f                    $679,578

Earrings Unlimited BALANCE SHEET as of June 30:

Assets:

Current Assets:

Cash                                  $83,308

Accounts Receivable$659,360

Inventory                          $86,240

Prepaid Insurance           $15,200    $844,108

Noncurrent Assets:

Property & Equipment$915,800

Depreciation                   $39,600    $876,200

Total Assets                                    $1,720,308

Liabilities + Equity:

Liabilities:

Accounts Payable        $149,730

Dividends Payable          $11,000     $160,730

Capital Stock               $880,000

Retained Earnings      $679,578  $1,559,578

Total Liabilities + Equity                $1,720,308

Explanation:

a) March Purchases:

Ending Inventory in units = 26,320(65,800 x 40%)

Units sold =                          40,820

Units available for sale =      67,140 (26,320 + 40,820)

Less Beginning Inventory = 16,320 (40,800 x 40%)

Purchases =                         50,820 units

Beginning Inventory =       $114,240 (40,800 x $7 x 40%)

Purchases =                     $355,740 (50,820 x $7)

Cost of goods available  $469,980

Less Closing Inventory      184,240 (26,320 x $7)

Cost of goods sold         $285,740

b) Accounts Receivable

Beginning Balance        $459,160

Sales                      $2,826,200

Cash Receipts         ($2,626,000)

Ending Balance           $659,360

c) Accounts Payable

Beginning Balance             $177,800

Purchases                       $1,423,800

Cash Disbursements($1,451,870)

Ending Balance                 $149,730

d) Sales Budget            January        February        March

Credit sales in unit          20,800         26,800          40,800

Selling price                        $13                 $13               $13

Sales Value                 $270,400     $348,400     $530,400

e) A master budget combines other smaller budgets within the business and turns them into one overall budget, which gives a comprehensive overview of the entity's finances.  The master budget includes the HR, marketing, and all other departmental budgets to produce an overall single budget.

answer; operating revenues;

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