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 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 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 71,875 pounds. At the end of each month, the raw materials inventory equals no less than 50 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) Labor Variable overhead Fixed overhead (includes depreciation of $190,000) Total $ 500,000 410,000 200,000 410,000 $1,520,000 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

Answer 1

A1. Computation of inventory budgets by months for prouction in units for April, May and June:

BRIGHTON, INC.
Schedule computing production budget (units) for April, May and June
	April	May	June
Budgeted Sales	600,000	500,000	600,000
Inventory required at end of month (25% of next month's sales)	125,000 (500,000 x 25%)	150,000 (600,000 x 25%)	150,000 (600,000 x 25%)
Total needs	725,000	650,000	750,000
Less: Inventory on hand at beginning of month	150,000	125,000	150,000
Budgeted production - units	575,000	525,000	600,000

A2. Computation of inventory budgets by months for raw materials purchases in pounds for April and May:

Schedule computing Raw materials inventory purchase budget (Pounds) For April and May
	April	May	June
Budgeted production - units	575,000	525,000	600,000
Materials required per tile	0.25 pound	0.25 pound	0.25 pound
Materials needed for production - pounds	143,750	131,250	150,000
Plus: Ending material inventory	65,625 (131,250 x 50%)	75,000 (150,000 x 50%)
Total needs	209,375	206,250
Less: Beginning material inventory	71,875	65,625
Budgeted Material purchases - pounds	137,500	140,625

B. Projected income statement for May:

BRIGHTON, INC
Projected Income Statement For the Month of May
Gross Sales (500,000 units x $4 per unit)		2,000,000
Less: Cash discount (2,000,000 x 1%)	20,000
Bad debt (2,000,000 x 0.50%)	10,000	30,000
Net Sales		1,970,000
Cost of Goods Sold:
Variable manufacturing Costs (500,000 x $2.22)	1,110,000
Fixed manufacturing costs	410,000	1,520,000
Gross profit		450,000
Selling expense (2,000,000 x 10%)		200,000
Administrative expense		160,000
Net Profit		90,000

Cash Budget for the month of May:

	May($)
Net Profit for May (as per above statement)	90,000
Add: Depreciation on office furniture and fixtures	160,000
Add: Depreciation included in Fixed manufacturing overhead	190,000
Cash available at the end of May	440,000