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 $600,000 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 43,125 pounds. At the end of each month, the raw materials inventory equals no less than 30 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 $2,500 per month on office furniture and fixtures, total $160,000 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		390,000
Variable overhead		200,000
Fixed overhead (includes depreciation of $210,000)		400,000
Total	$	1,490,000

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.

Answer 1

Ans a1
Production Budget	Year 2					working
	April	May	June	Total		July
expected sales in units	600000	500000	600000	1700000		600000
Add Desired Ending Inventory (25%*next month sales)	125000	150000	150000	150000		150000
Total Needs	725000	650000	750000	1850000		750000
Less Beginning Inventory	150000	125000	150000	150000		150000
Required Purchases in units	575000	525000	600000	1700000		600000
ans a2
	April	May	Total			June
Budgeted cost of raw material purchases
Budgeted production in units	575000	525000	1100000			600000
No. of pounds required	0.25	0.25	0.25			0.25
Total required	143750	131250	275000			150000
Add Desired Ending Inventory (30%*next month production)	39375	45000	45000
Total Needs	183125	176250	320000
Less Beginning Inventory	43125	39375	43125
Budgeted raw material purchases	140000	136875	276875
Raw material cost per pound	$4.00	$4.00	$4.00
Budgeted cost of raw material purchases	$560,000	$547,500	$1,107,500
ans b
Income Statement
	May
Gross sales (600000*4)	2400000
Less: Cash discounts	24000
Net sales		2376000
Cost of good sold (2.18*600000)+400000		1708000
Gross profit		668000
LesS: Operating expenses
Selling Expenses (10%*2400000)	240000
Administrative expenses	160000
Bad debt expenses (2376000*.5%)	11880
Total operating expenses		411880
Net Operating income		256120
working
Calculation of per unit cost			per unit cost
No. of units		500000
Materials (0.25 pound per tile, 125,000 pounds, $4 per pound)	$	500,000	1.00
Labor		390,000	0.78
Variable overhead		200,000	0.40
Total variable cost per unit			2.18
If any doubt please comment