Peter Johnson and Lily Brown own JB Manufacturing Company (JB). JB produced stor

Question

Peter Johnson and Lily Brown own JB Manufacturing Company (JB). JB produced storage sheds in three primary models (A, B, and C). The industry was dominated by Coleman, Phoenix, and Meco, which made several of types of sheds. JB was a small player in the industry with a solid customer base and a profitable business over last few years. This year was a little different – their profit was significantly lower than the prior years. The company’s 2017 financials are provided in Exhibit 1. The company produces 3 products – let’s call them Shed A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A), other costs, interest income, and interest expense are likely to remain the same no matter which product-line combinations the company produced. The company is thinking about the future and has provided a preliminary proforma 2018 sales budget in Exhibit 3. Favorable preliminary 2018 forecasts lead management to believe there will be excess cash flow in 2018. Management has requested that a consultant be hired to provide an analysis of several proposed 2018 investments. The details of the proposed investments are provided in Exhibit 4. The company hires your services as their consultant. They believe that they can improve their bottom-line (net profits) by changing the product mix, pricing and advertising decisions.

?? Prepare a purchases and cash receipts budget for September, October, and November using the 2018 sales budget provided in Exhibit 3.??

Exhibit 1

    3,757,000

Exhibit 2

All purchases of inventory are on account; 25% are paid in the month of purchase, and the remainder is paid in the month following the purchase.

Sales 38,650,000 minus cost of products sold 21,150,000 Gross Margin 17,500,000 SG&A     9,350,000 Other Costs     2,100,000 Operating Income     6,050,000 Minus Interest Expense        420,000 Plus Interest Income        150,000 Income Before Tax     5,780,000 Income Taxes     2,023,000 Net Income

    3,757,000

Explanation / Answer

SEPTEMBER Formula OCTOBER Formula NOVEMBER Formula Basis Cash sales 960000 870000 1140000 Collection against credit sales against sales effected in the respective month 1276800 57% of 2240000 being credit sales for Sept 1157100 57% of 2030000 being credit sales for Sept 1516200 57% of 2660000 being credit sales for Sept 5% are uncollectibe. 60% of collectibe i.e. 60% of 95% are collected in that month and balance 40% of 95% in the next month. This means that 57% of total credit sales are collected in that month and 38% in the next month Collection against made in earlier months 824600 38% of sale of August which was 2170000 851200 38% of sale of Sept which was 2240000 771400 38% of sale of October which was 2030000 Basis is as above COLLECTIONS AGAINST SALES 3061400 2878300 3427600 Payment made 507500 25% of 2030000 being purchase for Sept 665000 25% of 2660000 being purchase for Oct 630000 25% of 2520000 being purchase for Nov 25% in that month and 75% in next month Payment made 1627500 75% of 2170000 being purchase for previous month 1522500 75% of 2030000 being purchase for previous month 1995000 75% of 2660000 being purchase for previous month PAYMENT AGAINST PURCHASES 2135000 2187500 2625000 WORKING FOR PURCHASES Cost of purchase 2030000 70% of 2900000 being sales for Oct 2660000 70% of 3800000 being sales for Nov 2520000 70% of 3600000 being sales for Dec 70% of next months sales \

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