Question

Gulf States Manufacturing has the following data from year 1 operations, which are to be used for developing year 2 budget estimates:

Sales revenues (22,000 units)	$	1,980,000
Manufacturing costs
Materials	$	353,000
Variable cash costs		483,000
Fixed cash costs		195,000
Depreciation (fixed)		239,000
Marketing and administrative costs
Marketing (variable, cash)		256,000
Marketing depreciation		63,000
Administrative (fixed, cash)		252,000
Administrative depreciation	$	22,000
Total costs	$	1,863,000
Operating profits	$	117,000

All depreciation charges are fixed. Old manufacturing equipment with an annual depreciation charge of $16,550 will be replaced in year 2 with new equipment that will incur an annual depreciation charge of $23,000. Sales volume and prices are expected to increase by 13 percent and 7 percent, respectively. On a per-unit basis, expectations are that materials costs will increase by 11 percent and variable manufacturing costs will decrease by 3 percent. Fixed cash manufacturing costs are expected to decrease by 8 percent.

Variable marketing costs will change with volume. Administrative cash costs are expected to increase by 9 percent. Inventories are kept at zero. Gulf States operates on a cash basis.

Required:

Prepare a budgeted income statement for year 2. (Do not round intermediate calculations.)

Required:

Estimate the cash from operations expected in year 2.( Cash basis budgeted income statement)

Answer 1

Gulf States Manufacturing

Budgeted Income Statement for Year 2

Gulf States Manufacturing Corp
Budgeted Income Statement for Year 2
Sales		$2,394,018
Manufacturing costs
Materials		$442,757
variable cash costs		$529,416
Fixed cash costs		$179,400
Depreciation		$245,450
Marketing and administrative
Marketing (variable, cash)		$309,530
marketing depreciation		$63,000
Administrative (fixed, cash)		$274,680
Administrative (depreciation)		$22,000
Total costs		$2,066,233
Operating profit		$327,785

Sales units ,

22,000 + 13% of 22,000 = 24,860 units
selling price = (1,980,000/22,000) = $90
increased selling price = 90 + 7% x 90 = $96.30
material cost per unit = 353,000/22,000 = $16.05
increased = 16.05 + 11% 16.05 = 17.81
variable cost per unit = 483,000/22,000 = $21.95
decreased = 21.95 - 3% 21.95 = $21.30
Fixed cash costs = 195,000
decreased by 8% = 195,000 - 8% X 195,000 = $179,400
depreciation = 239,000 - 16,550 + 23,000 = $245,450
Variable marketing cost = (256,000/1,980,000) x 2,394,018 = $309,530
Administrative cash costs = $252,000
increase by 9% = 252,000 + 9% 252,000 = $274,680

Budgeted Income Statement (Cash Basis) for Year 2:

Gulf States Manufacturing Corp
Budgeted Income Statement for Year 2
Sales		$2,394,018
Manufacturing costs (cash)
Materials		$442,757
variable cash costs		$529,416
Fixed cash costs		$179,400
Total cash manufacturing costs		$1,151,573
Marketing and administrative costs:
Marketing (variable, cash)		$309,530
Administrative (fixed, cash)		$274,680
Total cash marketing and administrative costs		$584,210
Total cash costs		$1,735,783
cash operating profit		$658,235