Question

Requirement 2: The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget: Year 2 Quarter Year 3 Quarter Data 1 2 3 4 1 2 Budgeted unit sales 50,000 70,000 110,000 60,000 90,000 100,000 Selling price per unit $7

a. What are the total expected cash collections for the year under this revised budget?

b. What is the total required production for the year under this revised budget?

c. What is the total cost of raw materials to be purchased for the year under this revised budget?

d. What are the total expected cash disbursements for raw materials for the year under this revised budget?

e. After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 80,000 units in any one quarter. Is this a potential problem? Yes or No

Answer 1

Solution a:

Schedule of expected cash collection
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts receivables beginning	$65,000.00				$65,000.00
Cash received for Q1 Sale	$262,500.00	$87,500.00			$350,000.00
Cash received for Q2 Sale		$367,500.00	$122,500.00		$490,000.00
Cash received for Q3 Sale			$577,500.00	$192,500.00	$770,000.00
Cash received for Q4 Sale				$315,000.00	$315,000.00
Budgeted Cash Collection	$327,500.00	$455,000.00	$700,000.00	$507,500.00	$1,990,000.00

Solution b:

Production Budget
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year	Quarter 1, next year
Budgeted sales unit	50000	70000	110000	60000	290000	90000
Add: ending inventory (30% of next quarter sales)	21000	33000	18000	27000	27000	30000
Less: Beginning inventory	12000	21000	33000	18000	12000	27000
Estimated production unit	59000	82000	95000	69000	305000	93000

Solution c:

Budgeted Cost of raw material purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Budgeted Production units	59000	82000	95000	69000	305000
Raw material per unit (In Pounds)	5	5	5	5	5
Total requirement of raw materials	295000	410000	475000	345000	1525000
Add: Desired ending inventory (10% of next quarter production needs)	41000	47500	34500	46500	46500
Less: Beginning inventory	23000	41000	47500	34500	23000
Budgeted purchase units of raw material (In Pounds)	313000	416500	462000	357000	1548500
Raw material cost per pound	$0.80	$0.80	$0.80	$0.80	$0.80
Budgeted cost of purchases	$250,400.00	$333,200.00	$369,600.00	$285,600.00	$1,238,800.00

Solution d:

Schedule of expected cash disbursement for merchandise purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts Payable, Beginning	$81,500.00				$81,500.00
Q1 Purchases	$150,240.00	$100,160.00			$250,400.00
Q2 Purchases		$199,920.00	$133,280.00		$333,200.00
Q3 Purchases			$221,760.00	$147,840.00	$369,600.00
Q4 Purchases				$171,360.00	$171,360.00
Total payments	$231,740.00	$300,080.00	$355,040.00	$319,200.00	$1,206,060.00

Solution e:

As Budgeted production for quarter 2 and quarter 3 is more than 80000 units, therefore this is a potential problem.