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

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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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%u2014$14 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) 20,900 June (budget) 50,900
February (actual) 26,900 July (budget) 30,900
March (actual) 40,900 August (budget) 28,900
April (budget) 65,900 September (budget) 25,900
May (budget) 100,900

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 30% of the earrings sold in the following month.

Suppliers are paid $8 for a pair of earrings. One-half of a month's purchases is 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 60% is collected in the following month, and the remaining 20% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Sales commissions 4 % of sales
Advertising $ 199,100
Rent $ 17,100
Salaries $ 105,100
Utilities $ 6,100
Insurance $ 2,100
Depreciation $ 13,100

Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $15,300 in new equipment during May and $39,100 in new equipment during June; both purchases will be for cash. The company declares dividends of $10,500 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 Liabilities and Stockholders' Equity
Cash $ 150,000 Accounts payable $ 193,600
Accounts receivable ($75,320 February
sales; $458,080 March sales)
533,400 Dividends payable 10,500
Inventory 158,160 Capital stock 890,000
Prepaid insurance 21,900 Retained earnings 589,000
Property and equipment (net) 819,640

Total assets $ 1,683,100 Total liabilities and stockholders' equity $ 1,683,100

The company maintains a minimum cash balance of $30,000. 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 $30,000 in cash.

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

(c) A merchandise purchases budget in units and in dollars. (Omit the “$” sign in your response.)

April May June Quarter
Required unit purchases
Required dollar purchases $ $ $ $


A schedule of expected cash disbursements for merchandise purchases, by month and in total. (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

April May June Quarter
Accounts payable $ $ $ $
April purchases
May purchases
June purchases

Total cash payments $ $ $ $

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