Question

Paradise Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	41,500	October	31,500
August	93,000	November	18,000
September	62,000	December	18,500

The selling price of the beach umbrellas is $14 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $588,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.
4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30	98,450	feet
September 30	?	feet

5. Gilden costs $0.80 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $72,920.

Required:

1. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

2. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

3. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Answer 1

Working Notes
1	Sales Budget	For 3rd quarter
	Month	Units
	Jul	41500
	Aug	93000
	Sep	62000
	Total	196500
2	Production Budget
	Month	Sales	Closing Stock	Closing stock Calculation	Opening Stock	Opening stock Calculation	Units to be produced Sales+Closing Stock-Opening Stock
	Jul	41500	13950	93000*15%	6225	41500*15%	49225
	Aug	93000	9300	62000*15%	13950	93000*15%	88350
	Sep	62000	4725	31500*15%	9300	62000*15%	57425
	Oct	31500	2700	18000*15%	4725	31500*15%	29475
	Total	228000	27975		29475		195000

Answer (1) & (2)	Gilden Requirment Budget in feet and cost of raw Material.
	Month	Units to be produced	Gilden require for production	Closing Stock	Closing stock Calculation	Opening Stock	Opening stock Calculation	Gliden to be purchased in Feet	Cost of purchase
	Jul	49225	196900	176700	353400*50%	98450	196900*50%	275150	220120	275150*.80
	Aug	88350	353400	114850	229700*50%	176700	353400*50%	291550	233240	291550*.80
	Sep	57425	229700	58950	117900*50%	114850	229700*50%	173800	139040	173800*.80
	Oct	29475	117900				117900*50%
	Total	195000	780000	350500		390000		740500

Answer (3)	Expected Cash disbursments for Raw Material.
	Particulars	July	Aug	Sep
	June Month's Purchases
	Paid in July	72920
	July Month's Purchases
	Paid in July (220120*50%)	110060
	Paid in August (220120*50%)		110060
	August Months Purchases
	Paid in August (233240*50%)		116620
	Paid in September (233240*50%)			116620
	September Month's Purchases
	Paid in September (139040*50%)			86900
	Paid in October (139040*50%)
	Cash Disbursments	182980	226680	203520
	Cash Disbursment for 3rd Quarter
	July	182980
	August	226680
	September	203520
	Total	613180