master budget problem. only part B  in attached file

Part B: Master Budget

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—$10 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)

30,000

June (budget)

45,000

February (actual)

20,000

July (budget)

40,000

March (actual)

50,000

August (budget)

30,000

April (budget)

70,000

September (budget)

20,000

May (budget)

95,000

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 $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. Only 30% of a month’s sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 10% is collected in the second month following sale. 

Monthly operating expenses for the company are given below:

Variable:

Sales commissions

5% of sales

Fixed:

Advertising

$

190,000

Rent

$

20,000

Salaries

$

100,000

Utilities

$

8,000

Insurance

$

3,000

Depreciation

$

14,000

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

At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.

The company plans to purchase $20,000 in new equipment during May and $60,000 in new equipment 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 company’s balance sheet as of March 31 is given below:

Assets

Cash

$

74,000

Accounts receivable ($20,000   February sales; $350,000 March sales)

370,000

Inventory

80,000

Prepaid insurance

21,000

Property and   equipment (net)

950,000

Total assets

$

1,495,000

Liabilities and   Stockholders’ Equity

Accounts payable

$

100,000

Dividends payable

15,000

Common stock

800,000

Retained earnings

580,000

Total liabilities and stockholders’ equity

$

1,495,000

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.