Question

Rainy Day Company

The Business Situation

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                   $11,250

Advertising                                                     15,250

Cash, April 1                                            –0–

Depreciation on factory building                       1,500

Depreciation on office equipment                        800

Insurance on factory building                             1,500

Miscellaneous expenses—factory                      1,000

Office supplies expense                                         300

Professional fees                                                    500

Property taxes on factory building                        400

Raw materials used                                          70,000

Rent on production equipment                         6,000

Research and development                             10,000

Sales commissions                                            40,000

Utility costs—factory                                             900

Wages—factory                                                70,000

Work in process, April 1                         –0–

Work in process, April 30                       –0–

Raw materials inventory, April 1            –0–

Raw materials inventory, April 30         –0–

Raw material purchases                                   70,000

Finished goods inventory, April 1           –0–

Production and Sales Data

Number of umbrellas produced                     10,000

Expected sales in units for April

($40 unit sales price)                                       8,000

Expected sales in units for May                      10,000

Desired ending inventory                               20% of next month’s sales

Direct materials per finished unit                  1 kilogram

Direct materials cost                                       $7 per kilogram

Direct labor hours per unit                             .35

Direct labor hourly rate                                  $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

5. Identify the type of cost accounting system that Rainy Day Company is probably using at this time. Explain.

6. Under what circumstances might Rainy Day use a different cost accounting system?

7. Compute the unit variable cost for an umbrella.

8. Compute the unit contribution margin and the contribution margin ratio.

9. Calculate the break-even point in units and in sales dollars.

10. Prepare the following budgets for the month of April 2020.

(a) Sales.

(b) Production.

(c) Direct materials.

(d) Direct labor.

(e) Selling and administrative expenses.

(f) Cash.

(g) Budgeted income statement.

11. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and

10,000 units, in 1,000-unit increments.

12. Identify one potential cause of direct materials, direct labor, and manufacturing overhead variances in the production of the umbrella.

13. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget (requirement 10f).

Answer 1