Manny Fold owns a factory that specializes in making titanium valves for high pe
ID: 2468259 • Letter: M
Question
Manny Fold owns a factory that specializes in making titanium valves for high performance engines on a just in time basis. Thus, Manny produces what he sells in a particular month. There are no inventories of finished goods or work in process. However, Manny does require that an inventory of direct raw materials equal to 20% of next month’s production requirement be available at the end of each month. To build his business and gain new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his business, he is concerned about the possible income and cash flow implications.
The variable costs of producing a valve are budgeted at $7.20 per valve for direct materials (3/4 pound of titanium alloy costing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $74,700 per month during the 2nd quarter. The detailed components of variable and fixed overhead are as listed below.
For variable overhead, electric power is budgeted at $2.30 per unit, indirect labor is budgeted at $2.50 per unit, and supplies are budgeted at $.70 per unit. For fixed overhead depreciation is budgeted at
$10,000 per month, Supervision and other factory salaries are budgeted at $40,000 per month, property tax and insurance combined are budgeted at $8,000 per month (which have been paid in advance through June 15 – see below), maintenance is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are budgeted at $3,400 per month, and other miscellaneous fixed overhead expenses are budgeted at $6,300 per month.
Manny’s customers drive a hard bargain because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doing so and Manny is reluctant to get tough with them for fear they will take their business elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in the month of the sale, 30% of sales in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in June, 30% in July and 60% in August). On the other hand he must pay for 70% of his materials purchases in the same month of the purchase and 30% in the month after. Cash costs of labor and overhead other than depreciation, property taxes and insurance are paid in the same month they are incurred. Property taxes and insurance are paid in advance through June 15. The amount due for the next 6 months (starting June 16) must be paid in early June.
All of the selling and administrative expenses are fixed. Monthly fixed selling and administrative costs, other than interest, amount to $43,600, of which $6,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. Manny has large tax loss carry forwards from a previous unsuccessful business venture. Therefore he does not expect to pay any income taxes this year. (In other words you may ignore income taxes).
Manny plans to buy new equipment costing $80,000 during the month of June. This equipment will be ready for use starting in July.
The budgeted selling price of valves for April, May, and June is $23 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable during the 2nd quarter of 2014. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,000 units. He has projected sales of 19,000 units for June and 18,000 units for July.
Manny requires a minimum cash balance of $10,000 at the end of each month. If the budgeted month end cash balance will fall below this level Manny plans to borrow enough cash at the beginning of that same month to keep his ending balance up to the minimum level. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny pays the interest at the beginning of the following month and plans to repay as much as he can at the beginning of that month without letting his budgeted cash balance go below $10,000 at month end. (On the budgeted income statement round interest expense to the nearest dollar)
The company’s managerial accountant has resigned unexpectedly before the 2nd quarter budget could be completed. You have been contracted to complete the master budget for June and for the 2nd quarter (including some missing numbers from May). Balances as of March 31 for all relevant accounts have already been calculated by this accountant together with some of the amounts for April and May.
Construct Manny’s budgeted income statement for June and the total for the 2nd quarter. April and May have already been provided. Complete the template provided below. Show any necessary calculations.
Budgeted Income Statement
April
May
June
2nd Quarter
SALES REVENUES
$391,000
$414,000
DIRECT MATERIALS USED
($122,400)
($129,600)
DIRECT LABOR
($47,600)
($50,400)
VARIABLE OVERHEAD
($93,500)
($99,000)
CONTRIBUTION MARGIN
$127,500
FIXED OVERHEAD
($74,700)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
NET INCOME
$9,200
April
May
June
2nd Quarter
SALES REVENUES
$391,000
$414,000
DIRECT MATERIALS USED
($122,400)
($129,600)
DIRECT LABOR
($47,600)
($50,400)
VARIABLE OVERHEAD
($93,500)
($99,000)
CONTRIBUTION MARGIN
$127,500
FIXED OVERHEAD
($74,700)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
NET INCOME
$9,200
Explanation / Answer
Answer April May June 2nd Quarter Sales Revenue 391000 414000 437000 1242000 Direct Material Used (122,400) (129,600) (136,800) (388,800) Direct Labor (47,600) (50,400) (53,200) (151,200) Vaiable Overheads (93,500) (99,000) (104,500) (297,000) Contribution Margin 127500 135000 142500 405000 Fixed Overhead (74,700) (74,700) (74,700) (224,100) Fixed Operating Expenses (43,600) (43,600) (43,600) (130,800) Opertaing Income 9,200 16,700 24,200 50,100 Interest Expenses - (1,555) (1,110) (2,665) Net Income 9,200 15,145 23,090 47,435 Working notes June Direct material cost Unit 19000 direct material Unit (19000*3/4) 14250 Price (14250*9.60) 136800 Cash Budget April May June 2nd Quarter Opening cash 0 10876 10097 0 Collection 39100 158700 402500 600300 Total cash in hand 39100 169576 412597 600300 Direc material Payment 103824 136224 134064 374112 Labour 47,600 50,400 53,200 151200 Variable Overhead 93,500 99,000 104,500 297000 Salaries 40000 40000 40000 120000 Property tax & Insurance 0 0 48000 48000 Maintenace 7000 7000 7000 21000 Liacensing fee 3400 3400 3400 10200 Misclleonus overheads 6300 6300 6300 18900 Fixed Operating Expenses 37600 37600 37600 112800 Plant equipment purchased 0 0 80000 80000 Total cash payments 339224 379924 514064 1233212 Cash Balance after payments -300124 -210348 -101467 -632912 Interest exp. 0 1555 1110 2665 Cash borrow from banks 311000 222000 113000 646000 Cash in the hand 10876 10097 10423 10423 Cash collection & purchase disbural budget April May June July Unit sales 17000 18000 19000 18000 Sale price 23 23 23 Sale Value 391000 414000 437000 10% 39100 41400 43700 30% 117300 124200 60% 234600 cash collection 39100 158700 402500 Direct material required 12750 13500 14250 13500 Inventory required 2700 2850 2700 Total Need 15450 16350 16950 Less opening 0 2700 2850 Total unit required 15450 13650 14100 Cost per unit 148320 131040 135360 payment for direct material 70 % in the month 103824 91728 94752 30 % after month 44496 39312 Total payment required 103824 136224 134064
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