Question

Mama Angie’s Food Supplements, Inc.

   Mama Angie’s Food Supplements, Inc. (MAFS) manufactures a single product, Endless Energy (EE), which is an all-natural, healthy, vitamin infused dietary supplement. Endless Energy is sold only in one gallon containers.

   This year, 2018, MAFS has prospered, with projected pretax earnings of over $1.1 million on sales of $6.84 million. Management is now in the process of planning next year's activity. The marketing department has been exploring several avenues for 2019. 2018's healthy sales resulted from a modest advertising and promotional expenditure of $188,000. Marketing management now believes that a concerted digital media campaign in 2019 (that would increase selling and administrative expenses by $125,000) could substantially boost unit sales by as much as 17 percent.

   The production department has also proposed a change for 2019. It has suggested that capacity should be boosted from the current 750,000 gallons to 1.1 million gallons. The changes made for this expansion would also reduce variable manufacturing overhead to $1.95 per gallon. The cost of the expansion would be $500,000, consisting mainly of equipment to be purchased in the first quarter of 2019 and to be paid for in March. This increase to plant and equipment would be depreciated over a ten-year period, using the straight line method with no salvage value. A full year's depreciation would be expensed in the first year.

   MAFS has the following policies/practices: Ending finished goods inventory generally equals one month's sales. Raw materials are purchased and delivered on a justintime basis, so no inventory should exist. Payments on account of purchases of raw material are generally paid in the month following that in which they are incurred. All other expenditures are paid as incurred. Accounts receivable are usually collected 50% in the month of sale, 50% in the month following. All sales are on credit.

   The statement of cost of goods manufactured and sold for 2018 and the 2018 income statement (both prepared in October 2018 and reflecting best available estimates at the time) are attached, along with some additional data.

Requirements

1. Mama Angie is concerned that the expansion of production capacity may require the company to seek external sources of financing. Prepare a cash budget for the first quarter of 2019 (i.e., schedule the cash inflows and outflows for the quarter). What is the amount of financing that Mama Angie will need to arrange for the quarter? (You may find it useful to start by preparing a production schedule/budget for the first quarter).

2. Mama Angie needs to know what income will be generated for next year. Prepare a statement of budgeted cost of goods manufactured and cost of goods sold for the year 2019. Please prepare a budgeted income statement for 2019.

3. Assume that the marking department has an alternative marketing plan to reduce the price per gallon of Endless Energy by $1. They expect that sales would increase by 20 percent over the 2018 level, even without additional levels of advertising expenditures. Prepare a budgeted income statement for 2019 under this scenario.

4. Should Mama Angie accept the new marketing proposal? Please explain.

Mama Angie’s Food Supplements, Inc.

Data Table                        2018

Sales (gallons)                    570,000

Selling Price                        $12.00

Fixed Selling & Admin Expenses        $986,000.00

(includes depreciation of $36,000)

Commissions (as % of Sales Dollars)        5.00%

Shipping (as % of Sales Dollars)           3.00%

Variable Manufacturing Costs (per unit):

   Direct Materials                $4.00

   Direct Labor                    $1.00

   Variable Overhead                $2.00

   Fixed Manufacturing Costs (total,   $180,000.00

   includes depreciation of $60,000)

Total Production (gallons)            600,000

December's Production (gallons)        51,000

Inventory Summary: (gallons)

Finished Goods Inventory, Jan 1        21,000

Finished Goods Inventory, Dec 31        51,000

Budgeted cash balance, Dec 31        $50,000

Mama Angie Food Supplements, Inc.

Statement of Cost of Goods Manufactured & Sold

   for the Year Ended December 31, 2018

  

Cost of Goods Manufactured:

   Direct Materials                    $2,400,000.00

   Direct Labor                        600,000.00

   Variable Overhead                       1,200,000.00

   Fixed Manufacturing Cost                180,000.00

                                   $4,380,000.00

Add:

Finished Goods Inventory Jan 1               198,000.00

Total Available for Sale                   $4,578,000.00

Less:

Finished Goods Inventory Dec 31               (372,300.00)

Cost of Goods Sold                        $4,205,700.00

Income Statement

for the Year Ended December 31, 2018

   Sales                                   $6,840,000.00

   less: Cost of Goods Sold                       (4,205,700.00)

   Gross Margin                                $2,634,300.00

       Fixed Selling & Admin Expense            (986,000.00)

       Variable Selling & Admin Expense            (547,200.00)

   Operating Income                            $1,101,100.00

Answer 1

PROPOSAL 1
Working Note 1
It is given that by increasing sales promotion expenses the sales can be increased by 17%
So the new sales will be 570000+ 570000*17%					666900	Gallons
Inventory at the year end is not given but it is given that inventory is kept at one months sale
Average sales during the year will be 666900/12					55575	Gallons
So the production requirement will be Sales + Closing invetory - Opening inventory ie
Working Note 2
Increase in Manufacturing Fixed Overhead -New Equipment to be purchases $ 500000
Depreciation - On Straight Line Basis for 10 years without salvage value = 500000/10 ie $ 50000 per annum
Current Fixed Manufacturing Overheads			180000
Less Current Depreciation included			(60000)
Fixed Manufacturing Overhead without depreciation			120000
Depreciation     Existing	60000
Add : Depreciation of new Equip	50000
Total Deprecation			110000
Budgeted Fixed Overhead for 2019			230000
Note : Since the equipment is used for manufacturing process Depreciation will be considered in Manufacting overheads
Working Note 3
Sales in Gallons		666900
Selling Price		$12
Sales Value in Dollars		8002800
PRODUCTION BUDGET IN UNITS
Particulars	Gallons
Sales	666900
add : Closing inventory	55575
Less : Opeing Inventory	(51000)
Production	671475
COST OF GOODS MANURACTURED (PRODUCTION BUDGET) IN DOLLARS
Particulars	Gallons	Dollars/ Gallon	Dollars Per Annum	Dollars for First Quarter
Direct Material	671475	4	2685900	671475
Direct Labor	671475	1	671475	167869
Variable Overhead	671475	1.95	1309377	327345
Fixed Manfacturing Overhead			230000	57500
	671475	7.292531	4896752	1224189
Add : Finished Inventory on 1st Jan	51000		372300
Total Avaiable for Sales	722475		5269052
Less Closing Inventory	55575		405283
Cost of Goods Sold			4863769
COST OF GOODS SALES
Particulars	Gallons	Dollars/ Gallon	Dollars Per Annum	Dollars for First Quarter
Cost of Goods Sold			4863769	1215942
Add: Fixed Selling Expenses (Existing)			986000	246500
Add: Additional Fixed Expenses			125000	31250
Add: Variable Selling expenses
Commission 5% of $8002800			400140	100035
Shipping 3% of $ 8002800			240084	60021
Cost of Goods Sales			6614993
STATEMENT OF BUDGETED INCOME
Particulars	Dollars Per Annum
Sales	80,02,800.00
Less Cost of Sales	66,14,993.00
Income	13,87,807.00
Working Note for Cash Budget
1) Sales Collection
Monthly sale - 8002800/12 for 2019	666900
Collection for January
- Of December	282000	Average sale for month in 2018
-of January 50% of 666900	333450	570000/12 ie		47500
Collection for February		Sales for Month of December in dollars
-of January 50% of 666900	333450	47500*12		564000
-of February 50% of 666900	333450	Collection in December		282000
		Collection in January		282000
Collection of March
- of February 50% of 666900	333450
- Of March 50% of 666900	333450
Total Sales Collection	1949250
2) Raw Material Payment
Monthly Raw Material for 2018	200000	2400000/12
Monthly Raw Material for 2019	223825	2685900/12
Payment for Raw Material
In the month of January for December	200000	As payment is made one month credit
In the month of February for January	223825
In the month of March for February	223825
Total Raw Material Payment	647650
3) Fixed Cost Expneses in cash
Total Mfg Fixed cost per annum Without Dep	120000
Quarterly fixed Cost without depreciation	30000
Total Selling Fixed Cost p.a. without depreciation	950000	986000-36000
Quarterly fixed Cost without depreciation	237500
CASH BUDGET
Particulars	Dollars	Dollars
Cash Inflow
Sales Collection		1949250
Cash Outflow
Manufacturing Expenses
Raw Materail	647650
Labor	167869
Variable Overhead	327345
Fixed Manfacturing Overhead	30000
Fixed Selling Expenses Wthout Depreciation	237500
Additional Fixed Expenses	31250
Commission 5%	100035
Shipping 3%	60021	(1601670)
Cost of Equipment		(500000)
Net Cash flow		-152420
Add : Opening Balance		50000
Short fall to be borrowed		-102420
PROPOSAL 2
Reduce price by $1 and increase in sales by 20%
Calculation of sales
Existing sales	570000
Increased sales 20% of 570000	114000
Total Expected sales	684000
Selling price (Reduce by $1)	11
Sales in Dollars	7524000
Calculation of Production
Sales in Gallons	684000
Add: Closing inventory 684000/12	57000
	741000
Less Opening Inventory	51000
Production	690000
Note : Since existing capacity is 750000 gallons and production as budgeted is 690000 gallons
there is no need to increase capacity
	GALLONS	RATE	DOLLARS
Cost of Goods Sold
Direct Material	690000	4	2760000
Direct Labor	690000	1	690000
Variable Overhead	690000	2	1380000
Fixed Manufacturing Overhead			180000
	690000	7.26087	5010000
Add : Opening Inventory	51000		372300
			5382300
Less : Closing Inventory	57000		(413870)	57000*7.26087
Cost of Goods Sold			5796170
Income Statement
Sales	7524000
Less Cost of Goods Sold	(5796170)
Gross Margin	1727830
Less Fixed Selling Expenses	(986000)
Less : Variable Selling Expenses
Commission 5% on Sales	(376200)
Shipping 3% on sales	(225720)
Operating Income	139910
Proposal 1 is better than proposal 2