Question

Madison Development manufactures a product that requires 2 pounds of raw materials per its per unit. Partial information from the upcoming quarter's materials budget is shown below. Budgeted Production (units) October November December 55.000 Budgeted raw materials purchases (pounds) 45.000 7 114.000 122,000 102,000 The company plans that raw materials inventory at the end of each month quals 20% of the next que needs onth equals 20% of the next quarter's production Ir raw materials at the beginning of October is budgeted to be 22.000 pounds, November's budgeted pro pounds, November's budgeted production must be 61,000 units 45,000 units 65,000 units 75,000 units None of the above E 2 Knox, Inc. is planning to end January with a cash balance of $46,000 and no outstanding debt. For February, budgeted cash receipts total $110,000 and budgeted cash disbursements total $120,000. The company has an arrangement with its bank to borrow any amount on the first of any month, but the bank requires cash payment of 1% monthly interest on the outstanding borrowing at the end of each month. Knox is heading into its busy season and would like to build its cash reserves. If the company desires a February minimum ending cash balance of $60,000, to the nearest dollar, the minimum amount they would need to borrow at the beginning of the month is closest to be: A. $ 4,000 B. $ 23,763 CS 24,243 D $ 70,708 E. None of the above

Answer 1

1)	Gross R.M req on Oct		=	Beginning Inventory of R.M + R.M purchase required
			=	22000 pounds + 114000 pounds
			=	136000	pounds
	Total R.M req on Oct		=	Budgeted production x R.M req. per unit of production
			=	55000 units x 2 pound per unit
			=	110000	pounds
	Desired ending R.M
	on Oct		=	Gross R.M req - Total R.M req.
			=	136000 pounds - 110000 pounds
			=	26000	pounds
	The question says, Desired ending R.M inventory of the current month
	is equal to 20% of the total R.M req of the following month
	Therefore, Total R.M required on Nov = 26000 pounds / 20%
				=	130000	pounds
	R.M req. per unit of production			=	2	pounds
	Budgeted production on Nov			=	130000 pounds / 2
				=	65000	pounds

2)	Particulars			February
	Beginning cash balance			$   46,000.00
Add:	Cash receipts			$ 110,000.00
	Total cash available			$ 156,000.00
Less:	Cash disbursements			$ 120,000.00
	Cash balance after disbursement			$   36,000.00
	Minimum balance required			$   60,000.00
	Amount to be borrowed			$   24,000.00
	Int to be paid on the borrowal			$        243.00	(Int. on amount outstanding at the beginning of the month)
				$   24,243.00