Question

Freese, Inc., is in the process of preparing the fourth quarter budget for 2016, and the following data have been assembled:

The company sells a single product at a price of $67 per unit. The estimated sales volume for the next six months is as follows:

September	14,300	units
October	13,200	units
November	15,400	units
December	22,000	units
January	9,900	units
February	11,000	units

• All sales are on account. The company's collection experience has been that 30% of a month's sales are collected in the month of sale, 68% are collected in the month following the sale, and 2% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e., accounts receivable less allowance for uncollectible accounts) will be $651,508 on September 30, 2016.
• Management's policy is to maintain ending finished goods inventory each month at a level equal to 30% of the next month's budgeted sales. The finished goods inventory on September 30, 2016, is expected to be 3,960 units.
• To make one unit of finished product, 6 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 40% of the next month's estimated usage. The raw materials inventory is expected to be 33,264 pounds on September 30, 2016.
• The cost per pound of raw material is $2, and 70% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $50,134 on September 30, 2016.

Required:
a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2016.

b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2016.

c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2016.

d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2016.

e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2016. (Do not round intermediate calculations.)

Answer 1

Freese, Inc. Sales Budget Req A Calculation Oct Nov Dec Quarter Oct Nov Dec Sales (Units) 50,600 13,200 15,400 22,000 Selling price per unit 67 67 67 67 Sales (units)* Selling price per unit Total budgeted sales 884,400 1,031,800 1,474,000 3,390,200 Schedule of cash receipts Req B Calculation Oct Nov Dec Quarter Oct Nov Dec Sep sales 651,508 651,508 Oct sales 265,320 884400*30% 884400*68% 601,392 866,712 1031800*30% 1031800*68% Nov sales 309,540 701,624 1,011,164 Dec sales 1474000*30% 442,200 442.200 Total cash collections 916,828 910,932 1,143,824 2,971,584 Production budget Req C Oct Nov Dec Jan Quarter Oct Nov Dec Budgeted Next Months Sales (Units) 22,000 15,400 9,900 11,000 Ratio of inventory to future sales 30% 30% 30% 30% Budgeted Ending Inventory (Units) Budgeted Sales (Units) Budgeted Next Months Sales (Units) 30% 4,620 6,600 2,970 3,300 2,970 13,200 15,400 22,000 9,900 50,600 17,820 Inventory Needed 22,000 24,970 13,200 53,570 End Inv of Nov End Inv of Oct Less Beginning Inventory 3,960 4,620 6,600 2,970 3,960 Required Production (Units) 13,860 17.380 18,370 10,230 49.610 Raw Materials budget Req D Nov Oct Nov Dec Jan Quarter Oct Dec Required Production (Units) Materials required per unit Raw Material Required 49.610 13.860 17,380 18,370 10,230 6.00 6.00 6.00 6.00 6.00 Budgeted Production (Units)*6 - 104280*40% - 110220 *40 % 83,160 104,280 110,220 61,380 297,660 Add Ending Inventory -61380 *40% 41,712 44,088 24,552 24,552 Raw Materials Needed 124,872 148,368 134,772 322,212 End Inv of Nov 33,264 End Inv of Oct Less Beginning Inventory 33,264 41,712 44,088 Raw Material Purchased 91,608 106,656 90,684 288,948 Raw Material Cost per unit 2 2 2 Budgeted Raw Material Cost 183,216 213.312 181,368 577,896 Schedule of cash payments Req E Oct Nov Dec Quarter Oct Nov Dec Sep Purchases 50,134 50,134 183216*70% Oct Purchases 183216*30% 128,251 54,965 183,216 Nov Purchases 213312 70% 213312*30% 149,318 63.994 213,312 Dec Purchases 181368*70% 126,958 126,958 Total budgeted cash payments for materials 178,385 204,283 190,951 573,620

Answer 2

What does it mean? Question 1

Assume that Freese, Inc. decided that because of strong economic conditions in general, a 10% increase in the expected number of units to be sold each moth was realistic. Explain the effect, in general on each of the buddgets presented of a 10% increase in the number of units sold

ANSWER

In general if there was a 10% increase in the expected number of units sold each month, then it would Increase the Sales budget, Increase Cash Collections, increase production budget, and increase Materials purchases budget.

What does it mean? Question 2

Assuming that the number of units sold would not change, explain the effect on the budgets presented of a 5% increase in the selling price of the product. How does this price change effect differ from the sales volume effect you describd above?

ANSWER

In general if there was an increase of 5% in selling price per unit, while maintaining number of units sold, then it would Increase Sales budget, Increase Cash collections, Increase production budget, and increase Materials purchase budget. However because the 5 percentage is half that of the increase in the number of units ie 10%, the overall increase would be less then the above scenario.

What does it mean? Question 3

The purchasing manager is evaluating an alternative supplier that would provide a slightly lower grade of raw material at a savings from the current price of $4 per pound.  The new price would be at $3.50 per pound but the product would now require six pounds of the lower grade of raw material to produce the same number of good finished units as currently achieved.  Would you recommend the change to the new supplier?  What if the new price was to be $3.00?  How about a price of $3.285307?  Explain your answers.

ANSWER

If you were to increase the number of pounds from 5 to 6 lbs, the new number of pounds required would be 268800 lbs which is larger then 224000 lbs with the current model. The price for the new per lb cost is $3.5 compared to $4 before. The new price in total would be $940800 while the old price $867600. Clearly there is a larger cost for the raw materials using the new 3.5 price and 6 lbs therefore I would not recommend a change in the new supplier. If the price was at $3 per pound that I would recommend it as the new price total would be $806,400 and much less then the old cost. if the Price was $3.28307 the new price total would be $883090 and would be about $16000 more then the current price, and therefore I would not recommend it.