Question

The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget:

	Year 2 Quarter					Year 3 Quarter
Data	1	2	3	4		1	2
Budgeted unit sales	50,000	70,000	105,000	75,000		80,000	95,000
Selling price per unit	$7

Chapter 8: Applying Excel Data Year 3 Quarter 1 2 3 4 1 2 Budgeted unit sales 50,000 70,000 105,000 75,000 80,000 95,000 • Selling price per unit $7 per unit • Accounts receivable, beginning balance $65,000 • Sales collected in the quarter sales are made 75% • Sales collected in the quarter after sales are made 25% • Desired ending finished goods inventory is 30% of the budgeted unit sales of the next quarter • Finished goods inventory, beginning 12,000 units • Raw materials required to produce one unit 5 pounds • Desired ending inventory of raw materials is 10% of the next quarter's production needs • Raw materials inventory, beginning 23,000 pounds • Raw material costs $0.80 per pound • Raw materials purchases are paid 60% in the quarter the purchases are made and 40% in the quarter following purchase • Accounts payable for raw materials, beginning balance $81,500

a. What are the total expected cash collections for the year under this revised budget?

b. What is the total required production for the year under this revised budget?

c. What is the total cost of raw materials to be purchased for the year under this revised budget?

d. What are the total expected cash disbursements for raw materials for the year under this revised budget?

e. After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 80,000 units in any one quarter. Is this a potential problem?

No

Yes

Answer 1

Solution a:
Schedule of expected cash collection
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts receivables beginning	$65,000.00				$65,000.00
Cash received for Q1 Sale	$262,500.00	$87,500.00			$350,000.00
Cash received for Q2 Sale		$367,500.00	$122,500.00		$490,000.00
Cash received for Q3 Sale			$551,250.00	$183,750.00	$735,000.00
Cash received for Q4 Sale				$393,750.00	$393,750.00
Budgeted Cash Collection	$327,500.00	$455,000.00	$673,750.00	$577,500.00	$2,033,750.00

Soluiton b:
Production Budget
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year	Quarter 1, next year
Budgeted sales unit	50000	70000	105000	75000	300000	80000
Add: ending inventory (30% of next quarter sales)	21000	31500	22500	24000	24000	28500
Less: Beginning inventory	12000	21000	31500	22500	12000	24000
Estimated production unit	59000	80500	96000	76500	312000	84500

Soluiton c:
Budgeted Cost of raw material purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Budgeted Production units	59000	80500	96000	76500	312000
Raw material per unit (In Pounds)	5	5	5	5	5
Total requirement of raw materials	295000	402500	480000	382500	1560000
Add: Desired ending inventory (10% of next quarter production needs)	40250	48000	38250	42250	42250
Less: Beginning inventory	23000	40250	48000	38250	23000
Budgeted purchase units of raw material (In Pounds)	312250	410250	470250	386500	1579250
Raw material cost per pound	$0.80	$0.80	$0.80	$0.80	$0.80
Budgeted cost of purchases	$249,800.00	$328,200.00	$376,200.00	$309,200.00	$1,263,400.00

Soluiton d:
Schedule of expected cash disbursement for merchandise purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts Payable, Beginning	$81,500.00				$81,500.00
Q1 Purchases	$149,880.00	$99,920.00			$249,800.00
Q2 Purchases		$196,920.00	$131,280.00		$328,200.00
Q3 Purchases			$225,720.00	$150,480.00	$376,200.00
Q4 Purchases				$185,520.00	$185,520.00
Total payments	$231,380.00	$296,840.00	$357,000.00	$336,000.00	$1,221,220.00

Solution e:

Yes, this is a potential problem because desired production for quarter 3 is more than 80000 units.