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 $400,000 starting May 1. The bank would charge interest at the rate of 0.75 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 550,000 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 44,063 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 72,500 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 $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 $ 500,000 380,000 220,000 380,000 $1,480,000 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

a-1)

	April	May	June
Budgeted sales	600,000	550,000	600,000
Inventory required at end of month	137,500	150,000	150,000
Total needs	737,500	700,000	750,000
Less: opening inventory	(150,000)	(137,500)	(150,000)
Budgeted production (units)	587,500	562,500	600,000

a-2)

	April	May	June
Budgeted production (units)	587500	562500	600000
*raw material requirement	0.25	0.25	0.25
Budgeted production (pounds)	146,875	140,625	150,000
Inventory required at end of month	42,187.50	45,000.00
Total pound needs	189,063	185,625
Less: opening inventory	(44,063)	(42,188)
Balance required to purchase	145,000	143,438
Budgeted Purchases- Pounds	145,000	145,000	because quantities are purchased in shipment of 72,500

B)

Projected Income statement
For the Month of May
Sales revenue	$       2,200,000	550000*4
Cash discount on sales	$            22,000	1%*2200000
estimated bad debts	$            11,000	0.5%*2200000
Net sales	$       2,167,000
Cost of sales
Cost of goods sold	$       1,590,000	2.20*550000+380000
Selling expenses	$          220,000	10%*2200000
Expenses
Depreciation	$              2,500
Other administrative expenses	$          152,500
Profit for the period	$          202,000

Materials	$                           500,000
Labor	$                           380,000
VOH	$                           220,000
Total variable cost	$                        1,100,000
No of units	500,000
variable cost per unit	2.2

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