Facts: Manny Fold owns a factory that specializes in making titanium valves for
ID: 2570708 • Letter: F
Question
Facts:
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.
Requirment #1 Budgeted Income Statements
Requirment #2 Budgeted Purchases of Titanium Alloy
Requirement #3 Computation of Cash Collections
Requirement #3 (Continued) Computatin of Cash Payments
Combined Cash Budget
Requirment #4 Budgeted Balance Sheet for June 30
April May June 2nd Quarter Sales Revenue $391,000 $425,500 Direct Materials ($122,400) ($133,200) Direct Labor ($47,600) ($51,800) Variale Overhead ($93,500) ($101,750) Contribution Margin $127,500 Fixed Overhead ($74,700) ($74,700) Fixed Operting Expenses ($43,600) ($43,600) Operating Income $9,200 Interest Expense $0 Net Income $9,200Explanation / Answer
Sales Budget April May June Total Sales units 17000 18500 20000 55500 Selling price per unit 23 23 23 23 Budgeted sales 391000 425500 460000 1276500 All sales are on credit Schedule of collections April May June Total Budgeted sales 391000 425500 460000 1276500 Sales made 2 months ago 213900 220800 234600 669300 Sales made 1 month ago 110400 117300 127650 355350 Sales made this month 39100 42550 46000 127650 Total Collections 363400 380650 408250 1152300 Ending receivables = 60 % of May sales + 90% of june sales =255300+414000 = 669300 There is no inventory of finished goods. Production is equal to sales units. Raw material requirement budget April May June Total Production units 17000 18500 20000 55500 Raw material per unit (pounds) 0.75 0.75 0.75 0.75 Raw material required for production 12750 13875 15000 41625 Add: Desired ending inventory 2775 3000 2700 2700 (20% of next month's requirements) Raw material required for the month 15525 16875 17700 44325 Less: Beginning inventory 2550 2775 3000 2550 Raw material purchases (pounds) 12975 14100 14700 41775 Raw material cost per pound ($) 9.60 9.60 9.60 9.60 Raw material purchases ($) 124560 135360 141120 401040 Schedule of payments for purchases April May June Total Raw material purchases 124560 135360 141120 401040 Month of purchase 87192 94752 98784 280728 Month after purchase 34992 37368 40608 112968 Cash payment for raw materials 122184 132120 139392 393696 Ending accounts payable : 30% of June purchases = 30% of 141,120 = 42,336 Direct labor budget April May June Total Budgeted production units 17000 18500 20000 55500 Direct labor cost per unit 2.80 2.80 2.80 2.80 Total direct labor cost 47600 51800 56000 155400 Manufacturing overhead budget April May June Total Budgeted production 17000 18500 20000 55500 Variable manufacturing overhead per unit 5.50 5.50 5.50 5.50 93500 101750 110000 305250 Fixed manufacturing overhead April May June Total Depreciation 10000 10000 10000 30000 Supervision and factory salaries 40000 40000 40000 120000 Property tax and insurance 8000 8000 8000 24000 Licensing fee and permits 3400 3400 3400 10200 Maintenance 7000 7000 7000 21000 Other miscellaneous overheads 6300 6300 6300 18900 Total fixed overheads 74700 74700 74700 224100 Less: Property tax and insurance 8000 8000 8000 24000 Depreciation 10000 10000 10000 30000 Cashdisbursement for fixed overheads 56700 56700 56700 170100 Payment for property taxes and insurance 48000 48000 Prepaid property taxes and insurance 44000 Selling and administrative expenses April May June Total Selling and administrative expenses 43600 43600 43600 130800 Less: Depreciation 6000 6000 6000 18000 Cash disbursement for SG & A expenses 37600 37600 37600 112800 Cash budget April May June Total Beginning cash balance 10324 16140 16820 10324 Cash collections from sales 363400 380650 408250 1152300 Total cash available for disbursements 373724 396790 425070 1162624 Cash disbursements For raw materials 122184 132120 139392 393696 For direct labor 47600 51800 56000 155400 For variable manufacturing overead 93500 101750 110000 305250 For fixed manufacturing overhead 56700 56700 56700 170100 For property taxes and insurance 48000 48000 For selling and administrative expenses 37600 37600 37600 112800 For new equipment 80000 80000 Total cash disbursements 357584 379970 527692 1265246 Cash surplus / (Deficit) 16140 16820 -102622 -102622 Minimum cash balance 10000 10000 10000 10000 Borrowing 114000 114000 Ending cash balance 16140 16820 11378 11378 Income statement for the quarter ending June 30 Sales revnue 1276500 Less: Cost of goods sold * 1084350 Gross margin 192150 Selling and administrative expenses 130800 Net operating income 61350 Interest expense 570 Net income 60780 Cost of goods sold * Beginning inventory of raw material 24480 Purchases 401040 Total raw material available 425520 Ending inventory of raw material -25920 Raw material used for production 399600 Direct labor cost 155400 Variable manufacturing overhead 305250 Fixed manufacturing overhead 224100 Total manufacturing costs 1084350 This is the cost of goods sold as there is no inventory of finished goods. Balance sheet Assets Cash 11378 Accounts receivable 669300 Inventory (Raw material) 25920 Prepaid insunrace 44000 Total Current assets 750598 Equipment and furniture 960000 Less: accumulated depreciation -588000 372000 Total Assets 1122598 Liabilities and equity Accounts payable 42336 Interest payable 570 Borrowing from bank 114000 Total liabilities 156906 Beginning owner's equity 904912 Add: net income for the quarter 60780 Ending owner's equity 965692 Total liabilities and equity 1122598
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