Manny Fold owns a factory that specializes in making titanium valves for high pe

ID: 2468263 • Letter: M

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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. 3) Using the same forecast as you used in requirement 1 construct Manny’s cash budgets for June and the total for the 2nd quarter (You will also have to provide the missing number for May payments for purchases). Complete the templates provided below which already have information for April and May. Show any necessary calculations

COMPUTATION OF CASH COLLECTIONS (Use this to calculate March & Feb sales)

April

May

June

2nd Quarter

Sales Made 2 Months Ago

$213,900

$220,800

Sales Made 1 Month Ago

$110,400

$117,300

Sales Made this Month

$39,100

$41,400

Total Cash Collections

$363,400

$379,500

COMPUTATION OF CASH PAYMENTS

April

May

June

2nd Quarter

Payments for purchases of materials

$121,680 (used to calculate March purchases)

Payments for direct Labor

$47,600

$50,400

Payments for Variable Overhead

$93,500

$99,000

Payments for Fixed Overhead

$56,700

Payments for Property Taxes and Insurance

Payments for other operating expenses

$37,600

Capital Expenditures

Total Cash Payments

$357,080

April

May

June

2nd Quarter

Beginning Balance of Cash

$10,324

$16,644

Cash Collections

$363,400

$379,500

Total cash available

$373,724

$396,144

Less: Cash Payments

$357,080

Ending Cash Balance Before Financing:

$16,644

Borrowings

Repayments

Interest Payments

End Cash Balance

$16,644

April

May

June

2nd Quarter

Sales Made 2 Months Ago

$213,900

$220,800

Sales Made 1 Month Ago

$110,400

$117,300

Sales Made this Month

$39,100

$41,400

Total Cash Collections

$363,400

$379,500

Explanation / Answer

we will first calculate the cash inflows on sales made .given in the problem

the working note to calculate cash inflows are calculated below

402500

on the basis of working note the table of computations of collection is given below

April

May

June

2nd Quarter

Sales Made 2 Months Ago

$213,900

$220,800

$234,600

$669,300

Sales Made 1 Month Ago

$110,400

$117,300

$124,200

$351,900

Sales Made this Month

$39,100

$41,400

$43,700

$124,200

Total Cash Collections

$363,400

$379,500

$402,500

$1,145,400

Now we will calculate the direct material purchases and cash outflow on direct material as per conditions given in the problem

working note on direct material purchases and payments with direct labor , variable overhead

The information is incorporated in cash payments and the calculation of cash payments is given below

April

May

June

2nd Quarter

Payments for purchases of materials

$121,680 (used to calculate March purchases)

$,128,880

$134,064

$384,624

Payments for direct Labor

$47,600

$50,400

$53,200

$151,200

Payments for Variable Overhead

$93,500

$99,000

$104,500

$297,000

Payments for Fixed Overhead

$56,700

$170,100

Payments for Property Taxes and Insurance

$48,000

Payments for other operating expenses

$37,600

$112,800

Capital Expenditures

$80,000

Total Cash Payments

$357,080

$372,580

$514,064

$1,243,724

The payment of property taxes and insurance ia paid in june for advance 6 months @$8,000 per month , hence june payments is shown $ 48,000

The cash flow details of second quarter is given below after filling the data from above two sheet of cash inflow , cash payments .

April

May

June

2nd Quarter

Beginning Balance of Cash

$10,324

$16,644

$23,564

$10,324

Cash Collections

$363,400

$379,500

$402,500

$1,145,400

Total cash available

$373,724

$396,144

$426,064

$1,155,724

Less: Cash Payments

$357,080

$372,580

$514,064

$1,243,724

Ending Cash Balance Before Financing:

$16,644

$23,564

-$88,000

Borrowings

$99,000

Repayments

Interest Payments

End Cash Balance

$16,644

$23,564

$10,000

The interest will be paid on following month of borrowing and the interest of june borrowing Of $99,000 will be paid in july month only

Working note of cash inflows feb March April may june qyt rate total qyt rate total qyt rate total qyt rate total qyt rate total sales 15500 23 356500 16000 23 368000 17000 23 391000 18000 23 414000 19000 23 437000 cash inflow feb sales 35650 106950 213900 march sales 36800 110400 220800 april sales 39100 117300 234600 may sales 41400 124200 june sales 43700 total cash inflows 35650 143750 363400 379500

402500

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Manny Fold owns a factory that specializes in making titanium valves for high pe

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Manny Fold owns a factory that specializes in making titanium valves for high pe

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