Question

Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1.25 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May. The following information is available: The company budgeted sales at 600,000 units per month in April, June, and July and at 500,000 units in May. The selling price is $4 per unit. The inventory of finished goods on April 1 was 150,000 units. The finished goods inventory at the end of each month equals 25 percent of sales anticipated for the following month. There is no work in process. The inventory of raw materials on April 1 was 57,500 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 71,500 pounds per shipment. Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $2,500 per month on office furniture and fixtures, total $165,000 per month. The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows: Materials (0.25 pound per tile, 125,000 pounds, $4 per pound) $ 500,000 Labor 380,000 Variable overhead 200,000 Fixed overhead (includes depreciation of $220,000) 420,000 Total $ 1,500,000 Required: a-1. Prepare schedules computing inventory budgets by months for production in units for April, May, and June. a-2. Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for April and May. b. Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. When calculating net sales assume cash discounts of 1 percent and bad debt expense of 0.50 percent. Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for April and May. Schedule Computing Raw Materials Inventory Purchase Budget (Pounds) For April and May April May Total pound needs Balance required to purchase Budgeted purchases − Pounds Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. When calculating net sales assume cash discounts of 1 percent and bad debt expense of 0.50 percent. (Do not round intermediate calculations.) BRIGHTON, INC. Projected Income Statement For the Month of May Net Sales Cost of Sales: Expenses:

Answer 1

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Part a1
	April	May	June
Budgeted sales—Units	600,000	500,000	600,000
Inventory required at end of month	125,000	150,000	150,000
Total to be accounted for	725,000	650,000	750,000
Less inventory on hand at beginning of month	(150,000)	(125,000)	(150,000)
Budgeted production—Units	575,000	525,000	600,000
Part a2
	April	May	June
Budgeted production—Pounds (1/4 lb. per Unit)	143,750	131,250	150,000
Inventory required at end of month	52,500	60,000
Total to be accounted for	196,250	191,250
Less inventory on hand at beginning of month	(57,500)	(148,000)
Balance required by purchase	138,750	43,250
Budgeted purchases—Pounds
(Based on Minimum Shipments of 71,500 lbs. each)	143,000	71,500
Part b
Sales (500,000 Units at $4)			$     2,000,000
Less: Cash discounts on Sales		$         20,000
Estimated bad debts (1/2 percent of gross sales)		$         10,000	$         (30,000)
Net Sales			$     1,970,000
Cost of Sales:
Variable cost per unit	$1,080,000/500,000*500,000	$   1,080,000
Fixed Cost		$       420,000	$   (1,500,000)
Gross profit on sales			$         470,000
Expenses:
Selling (10 percent of gross sales)		$       200,000
Administrative ($165,000 per month)		$       165,000
Interest expense (.0125 x $500,000)		$            6,250	$      (371,250)
Operating profit			$           98,750