Question

Question 1:

Tonka toys manufactures a toy truck called “Big Red” that they distribute to retailers. The company is now planning for the third quarter of 2020. In order to keep production and shipments moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 30 percent of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,000 units.

2. Big Red, requires three kilograms of plastic to make. The raw material inventory on hand at the end of each month must be equal to one half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 64,500 kilograms. One kilogram of plastic can be purchased for $0.15.

3. The company maintains no work in process inventory.

4. The Big Red Truck sells for $35.00 per unit. Forecasted unit sales for Big Red for the last nine months of 2020 is given below:

Budgeted Sales (units)

April                                        30,000

May                                         35,000

June                                         39,000

July                                          40,000

August                                    50,000

September                               70,000

October                                   35,000

November                               20,000

December                                10,000

5. Fifteen percent of Big Red Truck sales are on a cash basis whereas the remaining eighty-five percent are on credit. History has shown the following collection pattern for credit sales:

30% are collected in the month of sale

40 % are collected in the month following the sale

20 % are collected two months after the sale

5% are collected three months after the sale

The remaining 5% are bad debts.

Required:

1. Prepare a production budget for Big Red for the third quarter of the year. Make sure you show each month separately as well as a total column for the third quarter.

2. Prepare a raw material purchase budget for the third quarter of the year. Make sure you show each month separately as well as a total column for the third quarter.

3. Prepare a schedule showing the cash collections resulting from credit sales. Make sure you show each month separately as well as a total column for the third quarter.

Answer 1

Answer a

Production Budget
Particulars	July	August	September	Total
Sales	40,000	50,000	70,000	160,000
Add: Desired Closing stock of Finished Goods	65,000	71,000	60,500	60,500
Total needs	105,000	121,000	130,500	220,500
Less: Opening stock of Finished Goods	17,000	65,000	71,000	17,000
Production required	88,000	56,000	59,500	203,500

Answer b

Purchases Budget
Particulars	July	August	September	Total
Production required	88,000	56,000	59,500	203,500
Plastic per unit	3	3	3	3
Total plastic required	264,000	168,000	178,500	610,500
Add: Closing stock of Raw Material	84,000	89,250	45,750	45,750
Total Requirement	348,000	257,250	224,250	656,250
Less: Opening stock of Raw Material	64,500	84,000	89,250	64,500
Purchases	283,500	173,250	135,000	591,750
Purchase price	$     0.15	$     0.15	$          0.15	$     0.15
Purchases in amount	42,525	25,988	20,250	88,763

Answer c

Cash receipts
	April	May	June	July	August	September
Sales	$ 30,000	$ 35,000	$      39,000	$ 40,000	$ 50,000	$      70,000
Collect 30%	$   9,000	$ 10,500	$      11,700	$ 12,000	$ 15,000	$      21,000
Collect 40%		$ 12,000	$      14,000	$ 15,600	$ 16,000	$      20,000
Collect 20%			$        6,000	$   7,000	$   7,800	$        8,000
Collect 5%				$   1,500	$   1,750	$        1,950
Cash received				$ 36,100	$ 40,550	$     50,950

Note:

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