Question

Big toys manufacture 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

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Big toys
Answer C
Sales Budget	April	May	June	July	August	September	Qtr. 3	Note
Sales (units)	30,000.00	35,000.00	39,000.00	40,000.00	50,000.00	70,000.00	160,000.00	A
Sell Price	35.00	35.00	35.00	35.00	35.00	35.00		B
Sales Budget	1,050,000.00	1,225,000.00	1,365,000.00	1,400,000.00	1,750,000.00	2,450,000.00	5,600,000.00	C=A*B
Cash sale is 15%				210,000.00	262,500.00	367,500.00	840,000.00	D=C*15%
Credit sale is 85%	892,500.00	1,041,250.00	1,160,250.00	1,190,000.00	1,487,500.00	2,082,500.00	4,760,000.00	E=C*85%

Schedule of Cash Receipts	July	August	September	Qtr. 3	Note
15% cash sale	210,000.00	262,500.00	367,500.00	840,000.00	See D
30% of credit sales collected in same month	357,000.00	446,250.00	624,750.00	1,428,000.00	F=E*30%
40% of credit sales collected in next month		476,000.00	595,000.00	1,071,000.00	G= 40% of E of previous month.
20% of credit sales collected in second month			238,000.00	238,000.00	H= 20% of E of previous to previous month.
Collection of April credit Sales -5%	44,625.00			44,625.00
Collection of May credit Sales -20%, 5%	208,250.00	52,062.50		260,312.50
Collection of June credit Sales -40%, 20%, 5%	464,100.00	232,050.00	58,012.50	754,162.50
Expected cash collections	1,283,975.00	1,468,862.50	1,883,262.50	4,636,100.00

Answer A
Production Budget	July	August	September	Qtr. 3	October	November	December	Note
Sales (units)	40,000.00	50,000.00	70,000.00	160,000.00	35,000.00	20,000.00	10,000.00	See C
Add: Desired Ending Inventory	20,000.00	26,000.00	15,500.00	15,500.00	11,000.00	8,000.00		I=30% of C of next month + 5,000 units.
Total needed	60,000.00	76,000.00	85,500.00	175,500.00	46,000.00	28,000.00
Less: Expected Beginning Inventory	17,000.00	20,000.00	26,000.00	17,000.00	15,500.00	11,000.00		J=30% of C of same month + 5,000 units.
Production Budget	43,000.00	56,000.00	59,500.00	158,500.00	30,500.00	17,000.00		K

Answer B
Direct Material Purchase Budget	July	August	September	Qtr. 3	October	Note
Production Budget	43,000.00	56,000.00	59,500.00	158,500.00	30,500.00	See K
Material required per unit	3.00	3.00	3.00		3.00	L
Material needed for production	129,000.00	168,000.00	178,500.00	475,500.00	91,500.00	M=K*L
Add: Desired Ending Inventory	84,000.00	89,250.00	45,750.00	45,750.00		N=50% of M of next month
Total needed	213,000.00	257,250.00	224,250.00	521,250.00
Less: Expected Beginning Inventory	64,500.00	84,000.00	89,250.00	64,500.00		O=50% of M of same month.
Direct Material Purchase Budget (Kg)	148,500.00	173,250.00	135,000.00	456,750.00		P
Cost per Kg	0.15	0.15	0.15			Q
Direct Material Purchase Budget ($)	22,275.00	25,987.50	20,250.00	68,512.50		R=P*Q