Manny Fold owns a factory that specializes in making titanium valves for high pe
ID: 2570253 • 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. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,500 units. He has projected sales of 20,000 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. You may assume that these balances and amounts shown in the tables below are correct.
1. 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 your calculations where indicated on the extra page provided. (7 points)
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 your calculations where indicated on the extra page provided. (3 points)
REQUIREMENT1 Budgeted Income Statement April S391,000 May S425,500 June 2nd Quarter SALES REVENUES DIRECTMATERIALS($122,400) (S133,200) USED DIRECT LABOR ($47,600) (S51,800) VARIABLE OVERHEAD CONTRIBUTION $127,500 MARGIN FIXED OVERHEAD ($93,500) ($101,750) FIXED OPERATING EXPENSES OPERATING INCOME INTEREST EXPENSE ($74,700)($74,700) ($43,600)($43,600) S 9,200 $0 NET INCOME S9,200 SHOW CALCULATIONS FOR JUNE AMOUNTS ON THE NEXT PAGEExplanation / Answer
Budgeted Income Statement
April
May
June
2nd Quarter
Sales revenues
391,000
425,500
460,000
1,276,500
Direct materials used
(122,400)
(133,200)
(144,000)
(399,600)
Direct Labor
(47,600)
(51,800)
(56,000)
(155,400)
Variable OH
(93,500)
(101,750)
(110,000)
(305,250)
Contribution Margin
127,500
138,750
150,000
416,250
Fixed OH
(74,700)
(74,700)
(74,700)
(224,100)
Fixed Operating expenses
(43,600)
(43,600)
(43,600)
(130,800)
Operating Income
9,200
20,450
31,700
61,350
Interest expense
-
570
(293,550)
Net Income
9,200
20,450
31,130
354,900
June
Sales In units
20,000
Rate
$ 23.00
Sales Revenue (a*b)
460,000
Direct materials ($7.2*20000)
144,000
Direct Labor ($2.8*20000)
56,000
Variable OH ($5.5*20,000)
110,000
Computation of Cash Payments
April
May
June
2nd Quarter
Payments for Purchase of materials
122,184
132,120
139,392
393,696
Payments for Direct Labor
47,600
51,800
56,000
155,400
Payments for Variable OH
93,500
101,750
110,000
305,250
Payments for Fixed OH
56,700
56,700
56,700
170,100
Payments for Property tax and insurance
-
-
48,000
48,000
Payments for Other operating expenses
37,600
37,600
37,600
112,800
Capital expenditure
80,000
80,000
Total Cash Payments
357,584
379,970
527,692
1,265,246
Combined Cash Budget
April
May
June
2nd Qtr
Beginning balance
10,324
16,140
16,820
10,324
Cash collections
363,400
380,650
408,250
1,152,300
Total Cash available
373,724
396,790
425,070
1,162,624
Less: Cash payments
357,584
379,970
527,692
1,265,246
Ending cash balance
16,140
16,820
(102,622)
(102,622)
Borrowings
114,000
114,000
Repayments
-
-
Interest payment
570
570
End cash balance
16,140
16,820
10,808
10,808
Purchase of Materials (In number of units)
Apr
May
Jun
80% of current month sales
13,600
14,800
16,000
20% of next month sales
3,700
4,000
3,600
Total Purchases
17,300
18,800
19,600
Rate
$ 7.20
$ 7.20
$ 7.20
Purchase of materials
124,560
135,360
141,120
Payment
70% for Current month
87,192
94,752
98,784
30% of Prior Month
34,992
37,368
40,608
Payments for Purchase of materials
122,184
132,120
139,392
Payments for Purchase of materials for May
40,608
As shown in working above
Payments for Purchase of materials
98,784
As shown in working above
Payments for Direct Labor
56,000
All expenses incurred are paid in the same month ($2.8*20000)
Payments for Variable OH
110,000
All expenses incurred are paid in the same month ($5.5*20000)
Payments for Fixed OH
56,700
=74,700 Total Fixed OH -8,000 (Property tax & Insurance paid in advance) - 10,000 (Depreciation)
Payments for Property tax and insurance
48,000
6 months expense paid in advance = 6*8,000
Payments for Other operating expenses
37,600
=43,600 Total Fixed OH -7,000 (Depreciation)
Capital expenditure
80,000
Budgeted capex
Total Cash Payments
527,692
Cash receipts from Sale
10% of current month
46,000
Jun sales - 10% of 460,000
30% of Prior month
127,650
30% of May sales
60% of sale made two months ago
234,600
60% of Jun sales
Cash receipts in Jun
408,250
May
June
Beginning balance
Is ending balance of April
Is ending balance of May
Cash collections
NA
calculated above
Total Cash available
Less: Cash payments
calculated above
calculated above
Ending cash balance
Borrowings
The shortfall is 102,622, Minimum cash balance is 10,000. Hence borrowing 114,000 (102622+10000approx 114,000)
Repayments
None in june
Interest payment
=114,000*.5%
Budgeted Income Statement
April
May
June
2nd Quarter
Sales revenues
391,000
425,500
460,000
1,276,500
Direct materials used
(122,400)
(133,200)
(144,000)
(399,600)
Direct Labor
(47,600)
(51,800)
(56,000)
(155,400)
Variable OH
(93,500)
(101,750)
(110,000)
(305,250)
Contribution Margin
127,500
138,750
150,000
416,250
Fixed OH
(74,700)
(74,700)
(74,700)
(224,100)
Fixed Operating expenses
(43,600)
(43,600)
(43,600)
(130,800)
Operating Income
9,200
20,450
31,700
61,350
Interest expense
-
570
(293,550)
Net Income
9,200
20,450
31,130
354,900
June
Sales In units
20,000
Rate
$ 23.00
Sales Revenue (a*b)
460,000
Direct materials ($7.2*20000)
144,000
Direct Labor ($2.8*20000)
56,000
Variable OH ($5.5*20,000)
110,000
Computation of Cash Payments
April
May
June
2nd Quarter
Payments for Purchase of materials
122,184
132,120
139,392
393,696
Payments for Direct Labor
47,600
51,800
56,000
155,400
Payments for Variable OH
93,500
101,750
110,000
305,250
Payments for Fixed OH
56,700
56,700
56,700
170,100
Payments for Property tax and insurance
-
-
48,000
48,000
Payments for Other operating expenses
37,600
37,600
37,600
112,800
Capital expenditure
80,000
80,000
Total Cash Payments
357,584
379,970
527,692
1,265,246
Combined Cash Budget
April
May
June
2nd Qtr
Beginning balance
10,324
16,140
16,820
10,324
Cash collections
363,400
380,650
408,250
1,152,300
Total Cash available
373,724
396,790
425,070
1,162,624
Less: Cash payments
357,584
379,970
527,692
1,265,246
Ending cash balance
16,140
16,820
(102,622)
(102,622)
Borrowings
114,000
114,000
Repayments
-
-
Interest payment
570
570
End cash balance
16,140
16,820
10,808
10,808
Purchase of Materials (In number of units)
Apr
May
Jun
80% of current month sales
13,600
14,800
16,000
20% of next month sales
3,700
4,000
3,600
Total Purchases
17,300
18,800
19,600
Rate
$ 7.20
$ 7.20
$ 7.20
Purchase of materials
124,560
135,360
141,120
Payment
70% for Current month
87,192
94,752
98,784
30% of Prior Month
34,992
37,368
40,608
Payments for Purchase of materials
122,184
132,120
139,392
Payments for Purchase of materials for May
40,608
As shown in working above
Payments for Purchase of materials
98,784
As shown in working above
Payments for Direct Labor
56,000
All expenses incurred are paid in the same month ($2.8*20000)
Payments for Variable OH
110,000
All expenses incurred are paid in the same month ($5.5*20000)
Payments for Fixed OH
56,700
=74,700 Total Fixed OH -8,000 (Property tax & Insurance paid in advance) - 10,000 (Depreciation)
Payments for Property tax and insurance
48,000
6 months expense paid in advance = 6*8,000
Payments for Other operating expenses
37,600
=43,600 Total Fixed OH -7,000 (Depreciation)
Capital expenditure
80,000
Budgeted capex
Total Cash Payments
527,692
Cash receipts from Sale
10% of current month
46,000
Jun sales - 10% of 460,000
30% of Prior month
127,650
30% of May sales
60% of sale made two months ago
234,600
60% of Jun sales
Cash receipts in Jun
408,250
May
June
Beginning balance
Is ending balance of April
Is ending balance of May
Cash collections
NA
calculated above
Total Cash available
Less: Cash payments
calculated above
calculated above
Ending cash balance
Borrowings
The shortfall is 102,622, Minimum cash balance is 10,000. Hence borrowing 114,000 (102622+10000approx 114,000)
Repayments
None in june
Interest payment
=114,000*.5%
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