Question

EYK 9-1. BUSINESS DECISION CASE The sales department of Donovan Manufacturing, Inc. has completed the following sales forecast for the months of January through MArch 2016 for its only two products: 50,000 units of J to be sold at $90 each and 30,000 units of K to be sold at $70 each. The desired unit inventories at March 31, 2016, are 10% of next quarter's unit sales forecast, which are 60,000 units of J and 30,000 units of K. The January 1, 2016, unit inventories were 5,000 units of J and 2,000 units of K.

Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase cost of B is $5 per pound. Materials A and B on hand at January 1, 2016, are 14,000 pounds of A and 8,000 pounds of B.

Each unit of J requires 0.5 hour of direct labor in the factory; each unit of K requires 1.0 hour of direct labor. The average hourly rate for direct labor is $12 per hour. Estimated manufacturing overhead cost is $6 per direct labor hour plus $90,000 per month. Selling and administrative expenses are estimated to be 10% of sales revenue plus $180,000 per month.

Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30% of credit sales for the quarter ended March 31, 2016, will occur in January, 30% in February, and 40% in March. Of credit sales ( December through MArch), 40% will be collected as cash in the month of sale and 55% will be collected in the following month. The remainder will be uncollectable. Cash collected in January 2016 from December 2015 sales will be $1,050,000.

The January 1, 2016, cash balance was $70,000. The minimum acceotable cash balance at the end of each month is $60,000. Short-term borrowing (6-month term) are made in multiples of $10,000. Interest is charged at a rate of 1% per month on short-term borrowings. The first interest payment is made the month following the borrowing. Cash disbursements (excluidng interest on short-term borrowings) are estiamted as follows:

January February March

Manufacturing costs $1,500,000 $1,300,000 $1,400,000

Selling and administrative expenses 390,000 410,000 400,000

Interest expense 90,000 90,000 90,000

Income tax payment 0 0 210,000

Capital expenditures 124,000 110,000 50,000

Cash dividends 300,000 0 0

Required

e. Prepare the manufacturing overhead budget for the quarter ended March 31, 2016.

f. Prepare the selling and administrative expenses budget for the quarter ended March 31, 2016.

g. Prepare a schedule of ash collected from customers for the quarter ended March 31, 2016.

h. Prepare the cash budget for the quarter ended March 31, 2016.

Answer 1

Donovan Manufacturing, Inc. i) Sales Budget Particulars Units to be sold Price per Unit Sales Product Product K 50,000.00 30,000.00 90.00 70.00 4,500,000.00 2,100,000.00 ii) Production Budget Particulars Units to be sold Add: Closing Inventory Less: Opening Inventory Product 50,000.00 6,000.00 (5,000.00) Product K 30,000.00 3,000.00 (2,000.00) Production to be done 51,000.00 31,000.00 iii) Raw Material Purchase Budget Material A Material B 153,000.00 Particulars Required for Production of 51000 x 3 51000 x 2 Required for Production of K 31000 x 2 31000 x 4 102,000.00 62,000.00 124,000.00 Raw Material Required 215,000.00 226,000.00 Less: Opening Balance of January 14,000.00 8,000.00 To be Purcahsed 201,000.00 218,000.00 Purcahse Price per Unit 9.00 5.00 Total Raw Material Purchase 1,809,000.00 1,090,000.00 iv) Labor Budget Particulars No. of Units to be produced Labor Hour required per Unit Product) Product K 51,000.00 31,000.00 0.50 1.00 Total Labor Hour Required 25,500.00 31,000.00 Direct Labor Rate per Hour 12.00 12.00 Total Labor Cost 306,000.00 372,000.00 v) Manufacturing Overhead Busget Particulars Labor Hour Required for Labor Hour Required for K 25,500.00 31,000.00 Total Labor Hoour Required Manufacturing overhead cost per direct labor 56,500.00 6.00 Total Variable Manufacturing Overhead Cost Add: Fixed Manufacturing Overhead Cost (90000 x3) 339,000.00 270,000.00 Total Manufacturing Overhead 609,000.00 vi) selling and administrative expenses budget Particulars Sales Revenue of Product for the Quarter Sales Revenue of Product K for the Quarter 4,500,000.00 2,100,000.00 Total Sales Revenue 6,600,000.00 Variable Selling & Administrative Expense (10%) Add: Fixed Manufacturing Overhead Cost (180000 x3) 660,000.00 540,000.00 Total Manufacturing Overhead 1,200,000.00 g) Schedule of cash collected from customers for the quarter ended March 31, 2016. Total Sales Revenue Cash Sales of 3 Months (300000 x 3) 6,600,000.00 900,000.00 Credit Sales for the Quarter 5,700,000.00 Credit Sales of January (30% of Credit Sales) Credit Sales of February (30% of Credit Sales) Credit Sales of March (40% of Credit Sales) 1,710,000.00 1,710,000.00 2,280,000.00 Particulars January February March Cash Sales of the Month 300,000.00 300,000.00 300,000.00 1,050,000.00 684,000.00 940,500.00 Cash Collected of December in January Cash Collected of January: 40% in January 55% in February Cash Collected of February: 40% in Fenruary 55% in march Cash Collected of March: 40% in March 684,000.00 940,500.00 912,000.00 Total Cash Collected from Customer 2,034,000.00 1,924,500.00 2,152,500.00 h) Cash Budget for Quarter ended March 31, 2016 Particulars January February March Opening Balance Add: Cash Sales Add: Collection from Customer Total Cash available 70,000.00 300,000.00 2,034,000.00 2,404,000.00 60,000.00 300,000.00 1,924,500.00 2,284,500.00 373,900.00 300,000.00 2,152,500.00 2,826,400.00 1,500,000.00 390,000.00 90,000.00 1,300,000.00 410,000.00 90,000.00 Less: Cash Disbursements Manufacturing costs Selling and administrative expenses Interest expense Income tax payment Capital expenditures Cash dividends Interest Expense on Short Term Borrowing Total Cash Disbursement 1,400,000.00 400,000.00 90,000.00 210,000.00 50,000.00 110,000.00 124,000.00 300,000.00 600.00 1,910,600.00 2,404,000.00 2.150,000.00 373,900.00 676,400.00 Closing Balance Add: Borrowing to Maintain Desaired Cash Balance 60,000.00 Desired ending Cash Balance 60,000.00 373,900.00 676,400.00