Question

Spring Manufacturing Company makes two components identified as C12 and D57. Selected budgetary data for 2019 follow:

	Finished Components
	C12				D57
Requirements for each finished component:
RM 1		10	pounds			8	pounds
RM 2		0				4	pounds
RM 3		2	pounds			1	pound
Direct labor		2	hours			3	hours
Product information:
Sales price		$150				$220
Sales (units)		12,000				9,000
Estimated beginning inventory (units)		400				150
Desired ending inventory (units)		300				200

	Direct Materials Information
	RM1				RM2				RM3
Cost per pound	$	2.00			$	2.50			$	0.50
Estimated beginning inventory in pounds		3,000				1,500				1,000
Desired ending inventory in pounds		4,000				1,000				1,500

The firm expects the average wage rate to be $25 per hour in 2019. Spring Manufacturing uses direct labor hours to apply overhead. Each year the firm determines the overhead application rate for the year based on budgeted direct labor hours for the year. The firm maintains negligible Work-in-Process Inventory and expects the cost per unit for both beginning and ending inventories of finished products to be identical.

	Factory Overhead Information
Indirect materials—variable	$	10,000
Miscellaneous supplies and tools—variable		5,000
Indirect labor—variable		40,000
Supervision—fixed		120,000
Payroll taxes and fringe benefits—variable		250,000
Maintenance costs—fixed		20,000
Maintenance costs—variable		10,080
Depreciation—fixed		71,330
Heat, light, and power—fixed		43,420
Heat, light, and power—variable		11,000
Total	$	580,830

	Selling and Administrative Expense Information
Advertising	$	60,000
Sales salaries		200,000
Travel and entertainment		60,000
Depreciation—warehouse		5,000
Office salaries		60,000
Executive salaries		250,000
Supplies		4,000
Depreciation—office		6,000
Total	$	645,000

The effective income tax rate for the company is 40%.

Spring Manufacturing Company has had a continuous improvement (kaizen) program for the last two years. According to the kaizen program, the firm is expected to manufacture C12 and D57 with the following specifications:

Cost Element	C12		D57
Raw material 1	9	lbs.	7	lbs.
Raw material 2	0		3.6	lbs.
Raw material 3	1.8	lbs.	0.8	lb.
Direct labor	1.5	hrs.	2	hrs.

The company specifies that the variable factory overhead is to decrease by 10% while the fixed factory overhead is to decrease by 5%, except for depreciation expenses. The company does not expect the price of the raw materials to change. However, the hourly wage rate is likely to be $30.

Required:

Assume the firm can attain the expected operating level as prescribed by the kaizen program:

1-a. Prepare the Sales budget for 2019.

1-b. Prepare the Production budget for 2019.

1-c. Prepare the Direct materials purchases budget (units and dollars) for 2019.

1-d. Prepare the Direct labor budget for 2019.

1-e. Prepare the Factory overhead budget for 2019.

1-f. Prepare the Cost of goods sold and ending finished goods inventory budgets for 2019.

1-g. Prepare the Selling and administrative expense budget for 2019.

1-h. Prepare the income statement, the last item of which is labeled After-tax Operating Income for 2019.

Answer 1