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You have just been contracted as a new management trainee by
Earrings Unlimited, a distributor of earrings to various retail outlets 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

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:

January (actual)


February (actual)


March (actual)


April (budget)


May (budget)


June (budget)


July (budget)


August (budget)


September (budget)


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 bracelets sold in the following month.

Suppliers are paid $4 for each bracelet. 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
discounts. 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 expenses:

Sales commissions 4% of sales

Fixed expenses:




Utilities $


Depreciation $14,000

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

The company plans to purchase $16,000 in new equipment
during May and $40,000 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.

Other relevant data is given below:

Cash balance as of September 30 $74,000

Inventory balance as of September 30 $112,000

Merchandise purchases for September $200,000

The company maintains a minimum cash balance of at least
$50,000 at the end of each month. 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 the exact amount needed 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 will
pay the bank all of the accrued interest on the loan and as much of the loan as
possible while still retaining at least $50,000 in cash.


Prepare a cash 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.
Determine any borrowing that would be needed to maintain the minimum cash
balance of $50,000.