Question

Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	38,000	October	28,000
August	86,000	November	14,500
September	55,000	December	15,000

The selling price of the beach umbrellas is $13 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $455,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.

4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

5. Gilden costs $0.60 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $48,390.

6. Required:

   1. Calculate the estimated sales, by month and in total, for the third quarter.

   2. Calculate the expected cash collections, by month and in total, for the third quarter.

   3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

   4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

   5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

   6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Answer 1

3. Calculation of the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October:-
Milo Company
Production Budget
For the third quarter
		July	August	September	October
	Estimated Sales Units	38,000	86,000	55,000	28,000
Add:	Desired Ending Finished Goods Inventory (15% of following month's unit sales)	12900	8250	4200	2175
	Goods Avaliable for Sale	50,900	94,250	59,200	30,175
Less:	Beginning Finished Goods Inventory	5,700	12,900	8,250	4,200
	Units to be produced	45,200	81,350	50,950	25,975
		July	August	September	October
a	Next month's unit sales	86,000	55,000	28,000	14,500
b	Desired Ending Finished Goods Inventory (15% of following month's unit sales) (a*15%)	12900	8250	4200	2175
*Beginning finished goods inventory = Ending FG inventory of previous month
*Beginning finished goods inventory (July) = Ending FG inventory of previous month (June)
Ending FG inventory of previous month (June) = 15% of next month's (July's) sales
*Beginning finished goods inventory (July) = 15% of current month's (July's) sales = 15% of 38000 = 5700
4. Calculation of the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter:-
Milo Company
Direct Materials Purchases Budget
For the third quarter
		July	August	September	Q3 Total	October
	Units to be produced	45,200	81,350	50,950		25,975
	Direct Materials per unit (feet)	4	4	4		4
	Production needs (feet)	180,800	325,400	203,800		103,900
Add:	Desired Ending Raw Materials Inventory (feet) (50% of the materials needed for the next month)	162,700	101,900	51,950
	Total needed (feet)	343,500	427,300	255,750
Less:	Beginning Raw Materials Inventory (feet)	90,400	162,700	101,900
	Purchases needed of raw Materials (feet)	253,100	264,600	153,850	671,550
		July	August	September
a	Materials needed for the following month	325,400	203,800	103,900
b	Desired Ending Raw Materials Inventory (50% of the materials needed for the following month) (a*50%)	162700	101900	51950
*Beginning Raw Materials inventory (July) = Ending Raw Materials inventory of previous month (June) = 9500 feet (given)
Ending Raw Materials inventory of previous month (June) = 50% of following month's (July's) production needs
*Beginning finished goods inventory (July) = 50% of current month's (July's) production needs = 50% of 180800 = 90400
*Ending Raw Materials inventory = Beginning Raw Materials inventory of next month
5. Calculation of the cost of the raw material (Gilden) purchases by month and in total, for the third quarter:-
Milo Company
Direct Materials Purchases Budget
		July	August	September	Q3 Total
	Purchases needed of raw Materials (feet)	253,100	264,600	153,850	671,550
	Cost per pound	$                                   0.60	$                                  0.60	$                                  0.60	$                                  0.60
	Total Purchases Direct Materials	$                             151,860	$                            158,760	$                              92,310	$                            402,930
6. Calculation of the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter:-
Milo Company
Schedule of Expected cash disbursements
For the Quarter ending September 30
		July	August	September	Q3 Total
	Total Purchases Direct Materials	$                             151,860	$                            158,760	$                              92,310
	1/2 portion	$                               75,930	$                              79,380	$                              46,155
	Remainder portion	$                               75,930	$                              79,380	$                              46,155
	1/2 portion paid in the month of purchase	$                               75,930	$                              79,380	$                              46,155
	Remainder paid in the month following purchase	$                               48,390	$                              75,930	$                              79,380
	Expected Cash disbursements	$                             124,320	$                            155,310	$                            125,535	405,165
	The accounts payable on July 1 for purchases of Gilden during June will be $48,390 (Given)

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