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 1.00 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 550,000 units per month in April, June, and July and at 450,000 units in May. The selling price is $4 per unit. • The inventory of finished goods on April 1 was 110,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process. • The inventory of raw materials on April 1 was 53,000 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 64,500 pounds per shipment. • Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $3,000 per month on office furniture and fixtures, total $155,000 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) Labor Variable overhead Fixed overhead (includes depreciation of $200,000) Total $ 500,000 390,000 210,000 410,000 $1,510,000 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.

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Answer 1

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Part a1
	April	May	June
Budgeted sales—Units	550,000	450,000	550,000
Inventory required at end of month	90,000	110,000	110,000
Total to be accounted for	640,000	560,000	660,000
Less inventory on hand at beginning of month	(110,000)	(90,000)	(110,000)
Budgeted production—Units	530,000	470,000	550,000
Part a2
	April	May	June
Budgeted production—Pounds (1/4 lb. per Unit)	132,500	117,500	137,500
Inventory required at end of month	47,000	55,000
Total to be accounted for	179,500	172,500
Less inventory on hand at beginning of month	(57,000)	(53,500)
Balance required by purchase	122,500	119,000
Budgeted purchases—Pounds
(Based on Minimum Shipments of 64,500 lbs. each)	129,000	64,500
Part b
Sales (450,000 Units at $4)			$     1,800,000
Less: Cash discounts on Sales		$      18,000
Estimated bad debts (1/2 percent of gross sales)		$        9,000	$         (27,000)
Net Sales			$     1,773,000
Cost of Sales:
Variable cost per unit	$1,100,000/500,000*450,000	$   990,000
Fixed Cost		$   410,000	$   (1,400,000)
Gross profit on sales			$         373,000
Expenses:
Selling (10 percent of gross sales)		$   180,000
Administrative ($165,000 per month)		$   155,000
Interest expense (.01 x $500,000)		$        5,000	$      (340,000)
Operating profit			$           33,000