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Part B: Master BudgetYou have just been hired as a new management trainee by Earrings Unlimited, a distributor ofearrings to various retail outlets located in shopping malls across the country. In the past, thecompany has done very little 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 this end, you have worked withaccounting and other areas to gather the information assembled below.The company sells many styles of earrings, but all are sold for the same price$10 per pair. Actualsales of earrings for the last three months and budgeted sales for the next six months follow (in pairsof earrings):January (actual) 20,000 June (budget) 50,000February (actual) 26,000 July (budget) 30,000March (actual) 40,000 August (budget) 28,000April (budget) 65,000 September (budget) 25,000May (budget) 100,000The concentration of sales before and during May is due to Mothers Day. Sufficient inventory shouldbe on hand at the end of each month to supply 40% of the earrings sold in the following month.Suppliers are paid $4 for a pair of earrings. One-half of a months purchases is paid for in the monthof purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of amonths sales are collected in the month of sale. An additional 70% is collected in the followingmonth, and the remaining 10% is collected in the second month following sale. Bad debts have beennegligible.Monthly operating expenses for the company are given below:Variable:Sales commissions 4% of salesFixed:Advertising $ 200,000Rent $ 18,000Salaries $ 106,000Utilities $ 7,000Insurance $ 3,000Depreciation $ 14,000Insurance is paid on an annual basis, in November of each year.The company plans to purchase $16,000 in new equipment during May and $40,000 in newequipment during June; both purchases will be for cash. The company declares dividends of$15,000 each quarter, payable in the first month of the following quarter.The companys balance sheet as of March 31 is given below:AssetsCash $ 74,000Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000Inventory 104,000Prepaid insurance 21,000Property and equipment (net) 950,000Total assets $ 1,495,000Liabilities and Stockholders EquityAccounts payable $ 100,000Dividends payable 15,000Common stock 800,000Retained earnings 580,000Total liabilities and stockholders equity $ 1,495,000The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginningof 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 forsimplicity we will assume that interest is not compounded. At the end of the quarter, the companywould 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 $50,000 in cash.
Required:Prepare a master budget for the three-month period ending June 30. Include the following detailedschedules: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 units and in dollars. Show the budget by month andin total.d. A schedule of expected cash disbursements for merchandise purchases, by month and intotal.2. A cash budget. Show the budget by month and in total. Determine any borrowing that wouldbe needed to maintain the minimum cash balance of $50,000.3. A budgeted income statement for the three-month period ending June 30. Use thecontribution approach.4. A budgeted balance sheet as of June 30.
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