Question

The following information is available for year 1 for Pepper Products: $2,900,000 $ 168,000 152,400 327,600 989,000 Sales revenue (200,000 units) Manufacturing costs Materials Variable cash costs Fixed cash costs Depreciation (fixed) Marketing and administrative costs Marketing (variable, cash) Marketing depreciation Administrative (fixed, cash) Administrative depreciation Total costs Operating profits 412,400 149,600 509,200 64,800 $2,773,000 $ 127,000 All depreciation charges are fixed and are expected to remain the same for year 2. Sales volume is expected to fall by 4 percent, but prices are expected to rise by 18 percent. Material costs per unit are expected to increase by 12 percent. Other unit variable manufacturing costs are expected to decrease by 11 percent per unit. Fixed cash costs are expected to increase by 5 percent. Variable marketing costs will change with unit volume. Administrative cash costs are expected to increase by 6 percent. Inventories are kept at zero. Pepper Products operates on a cash basis. Required: Estimate the cash from operations expected in year 2. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amounts.)

Answer 1

Solutions:

Pepper Products
Cash Basis Budgeted Income Statement
For Year 2
Sales Revenue	3285120
Manufacturing Costs (cash)
Materials	180634
Variable cash costs	130211
Fixed Cash Costs	343980
Total Cash Manufacturing Cost	654824
Marketing and Administrative Costs
Marketing (variable, costs)	395904
Administrative (fixed , cash)	539752
Total Cash marketing and Administrative Costs	935656
Total Cash Costs	1590480
Cash Operating Profit	1694640

Sales revenue = $3,285120 ($2,900,000 × 0.96× 1.18)

Alternatively, (0.96 × 200,000 units) × (1.18 × $14.5 per unit)

Materials = $180634 ($168,000 × 0.96 × 1.12)

Other variable costs = 130211 ($152,400 × 0.96 × 0.89)

Fixed cash costs = 343,980 ($327,600 × 1.05)

Marketing (variable, cash) = $395904 ($422,400 × 0.96)

Administrative (fixed, cash) = 539752 ($509,200 × 1.06)

Cash from operations would equal revenues less cash costs, which excludes depreciation