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.

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

9. Total variable costs per unit = Direct Materials + Direct Labor + Sales Commission = 1 kg. x $ 7 + 0.35 hours x $ 20 + $ 5= $ 19

Contribution margin per unit = Selling price - Variable costs = $ 40 - $ 19 = $ 21

Total fixed cost = $ 49,400

Break-even number of units = $ 49,400 / $ 21 = 2,352.38 units

Breakeven sales dolars = 2,352.38 units x $ 40 = $ 94,095.24

10.a.

Sales Budget
	April	May	Total
Unit Sales	8,000	10,000	18,000
Selling price per unit	$ 40	$ 40	$ 40
Budgeted sales revenue	$ 320,000	$ 400,000	$ 720,000

b.

Production Budget
	April	May	Total
Unit sales	8,000	10,000	18,000
Add: Desired ending invetory	2,000
Total finished goods needed	10,000
Less: Beginning inventory	0
Required production in units	10,000

c.

Direct Materials Budget
	April
Required production in units	10,000
Qty required per unit	1 kg.
Total direct materials used in production	10,000 kgs.
Add: Desired ending inventory	0
Total inventory needed	10,000 kgs.
Less: Beginning inventory	0
Direct materials to be purchased	10,000 kgs
Cost per kg.	$ 7
Budgeted cost of direct materials purchases	$ 70,000

d.

Direct Labor Budget
	April
Budgeted production in units	10,000
Direct labor hours per unit	0.35
Direct labor hours required	3,500 hrs
Direct labor hour rate	$ 20
Budgeted cost of direct labor	$ 70,000

e.

Selling and Administrative Expenses Budget
	April
Advertising expense	$ 15,250
Sales Commission	40,000
Administrative salaries	11,250
Office Supplies Expense	300
Professional Fees	500
Research and development	10,000
Total cash expenses	77,300
Depreciation on office equipment	800
Total budgeted selling and administrative expenses	78,100

f.

Cash Budget For April 2020
Beginning cash balance		$ 0
Ad: Cash receipts		240,000
Total cash available		240,000
Less: Cash disbursements for
Purchase of direct materials	$ 52,500
Direct labor	70,000
Manufacturing overhead	9,800
Selling and administrative expenses	77,300
Purchase of equipment	720,000
Total cash disbursements		929,600
Cash Surplus( Deficiency)		(689,600)
Borrowing		719,600
Ending cash balance		$ 30,000

g.

Income Statement For the month ended April 30, 2020
Sales		$ 320,000
Cost of Goods Sold
Direct materials	$ 70,000
Direct labor	70,000
Manufacturing overhead	11,300
Cost of goods manufactured	151,300
Add: Beginning finished goods inventory	0
Cost of goods available for sale	151,300
Less: Ending finished goods inventory	(30,260)	121,040
Gross Margin		198,960
Selling and Administrative Expenses		78,100
Income from Operations		120,860
Income taxes @ 45 %		54,387
Net income		$ 66,473