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 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 $3,000 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) Labor Variable overhead Fixed overhead (includes depreciation of $190,000) Total $ 500,000 390,000 200,000 390,000 $1,480,000

Answer 1

a) Schedule computing Production Budget (Units)

BRIGHTON,INC. Schedule computing Production Budget (Units) For April, May and June
	April	May	June
Budgeted Sales (Given) (A)	600,000	500,000	600,000
Inventory required at the end of the month (25% of sales of next month) (B)	125,000 (600,000*0.25)	150,000 (500,000*0.25)	150,000 (500,000*0.25)
Total needs (A+B)	725,000	650,000	750,000
Less: Inventory at hand in the beginning	150,000(given)	125,000 (ending Inventory of April)	150,000 (ending Inventory of May)
Budgeted Production (Units)	575,000	525,000	600,000

b) Schedule computing Raw Material Inventory:-

Schedule computing Raw Material Inventory Purchase Budget (Pounds) For April and May
	April	May
Budgeted production need in pounds (Budgeted Sales*0.25 pounds) (a)	143,750	131,250
Inventory required at the end of the month (b)	52,5001	60,0002
Total pound needs (a+b)	196,250	191,250
Less:Inventory on hand at the beginning of month	57,500 (given)	52,500(Ending Inventory of April)+4,2503
Balance required to purchase	138,750	134,500
Budgeted purchase (Pounds)	143,000 (71,500 + 71,500)	143,000 (71,500 + 71,500)

Working Notes:

1) Inventory at end of the month of April = Budgeted production requirements*40% = 131,250 pounds*0.40 = 52,500

2)Inventory at end of the month of May = June Budgeted production (units)*0.25 pounds*40%

=600,000*0.25 pounds*0.40 = 60,000

3) Inventory at End of April will be slightly more than 52,500 because we can purchase raw material in quantities of 71,500 pounds per shipment. So the difference between the balance of raw material required to purchase (138,750) and Budgeted purchase(143,000) will be added to the ending raw material inventory of April.

c) Projected Income Statement (Amounts in $)

BRIGHTON Inc. Projected Income Statement For the month of May
Sales Revenue (500,000*$4) (A)		2,000,000
Cash Discount on Sales (A*0.01)	20,000
Estimated Bad Debts (A*0.50)	10,000
(B)		30,000
Net Sales (C=A-B)		1,970,000
Cost of Sales:
Variable Cost (D)	1,090,0001
Fixed Cost (E)	390,000
Total Cost (F=D+E)		1,480,000
(G)		490,000
Expenses:
Selling Expenses (A*10%) (H)	200,000
Administrative Expenses (I)	160,000
Total Expenses (J=H+I)		360,000
Operating Profit (G-J)		130,000

Working Notes:

1) Variable Cost = Cost of Raw Material + Labor Cost+ Variable Overhead

= 500,000 units*0.25 pounds per unit *$4 per pound +$390,000 +$200,000

=$1,090,000