Endless Mountain Company manufactures a single product that is popular with outd

Question

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows: Endless Mountain Company Balance Sheet December 31, 2016 Assets Current assets: Cash $ 46,200 Accounts receivable (net) 260,000 Raw materials inventory (4,500 yards) 11,250 Finished goods inventory (1,500 units) 32,250 Total current assets $ 349,700 Plant and equipment: Buildings and equipment 900,000 Accumulated depreciation (292,000 ) Plant and equipment, net 608,000 Total assets $ 957,700 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 158,000 Stockholders’ equity: Common stock $ 419,800 Retained earnings 379,900 Total stockholders’ equity 799,700 Total liabilities and stockholders’ equity $ 957,700 The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget: The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units. All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter. Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales. Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards. Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter. Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred. The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred. The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred. The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings. Dividends of $15,000 will be declared and paid in each quarter. The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers. 2. Prepare a budgeted variable costing income statement for 2017. Stop your computations at net operating income.

Explanation / Answer

Balance Sheet 2016 Cash 46200 Accounts payable 158000 Accounts Receivable 260000 Raw Materials inventory(4500 yards) 11250 Stockholders Equity Finished goods inventory(1500 units) 32250 Common Stock 419800 Total Current assets 349700 Retained earnings 379900 799700 Plant and Equipment Buildings and Equipment 900000 Accumulated depreciation -292000 Plant and Equipment, Net 608000 Total assets 957700 957700 Sales Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Sales (Units) 12000 37000 15000 25000 89000 13000 Sale Unit Price 32 32 32 32 32 Sales 384000 1184000 480000 800000 2848000 Production Budget Sales 89000 Ending Inventory(15%*13000) 1950 Total Units required 90950 Less : Opening Inventory -1500 Units to be produced 89450 Raw Material to be purchased Units to be produced 89450 3.5 Total yard required 313075 Add: Closing Inventory 5000 Less : Opening Inventory 4500 Raw Material to be purchased 313575 Unit price 3 Direct Material costs 940725 Direct Labor Units to be produced 89450 89000 Labor hours 22362.5 22250 Labor Rate 18 Direct Labor costs 402525 400500 Selling and Administrative Expense Sales 89000 Unit Price 1.25 Selling and Administrative Expense 111250 Budgeted variable costing income statement for 2017 Revenue 2848000 Less : Cost of Goods Sold 1335000 Gross Profit 1513000 Less : Selling and administrative expenses -111250 Contribution Margin 1401750

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