Question

Milo 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:

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.

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.

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.

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

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 estimated sales, by month and in total, for the third quarter.

2. Calculate the expected cash collections, by month and in total, for the third quarter.

3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

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

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

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

Answer 1

Solution 1:

Estimated sales
Particulars	July	August	September	Total (Quarter)
Sales in Units	41500	93000	62000	196500
Selling Price per unit	$14.00	$14.00	$14.00	$14.00
Estimated sales	$581,000.00	$1,302,000.00	$868,000.00	$2,751,000.00

Solution 2:

Computation of Expected cash Collection
Particulars	July	August	September	Total (Quarter)
Estimated sales	$581,000.00	$1,302,000.00	$868,000.00	$2,751,000.00
Cash Colletion (30% in same month and 65% in next month):
Receipts from June Sales	$382,200.00			$382,200.00
Receipts from July sales	$174,300.00	$377,650.00		$551,950.00
Receipts from August sales		$390,600.00	$846,300.00	$1,236,900.00
Receipts from September sales			$260,400.00	$260,400.00
Total Expected cash collection	$556,500.00	$768,250.00	$1,106,700.00	$2,431,450.00

Solution 3:

Computation of Estimated Production of Beach Umbrellas
Particulars	July	August	September	October
Sales in Units	41500	93000	62000	31500
Required ending Inventory (15% of Following month Sale)	13950	9300	4725	2700
Opening Inventory	6225	13950	9300	4725
Estimated Production (Sales + Ending Inventory - Opening Inventory)	49225	88350	57425	29475

Solution 4:

Computation of quantity of Gilden to be purchased
Particulars	July	August	September	Total
Estimated Production	49225	88350	57425	195000
Required qty of Gilder per unit (In feet)	4	4	4	4
Total requirement of Gilden	196900	353400	229700	780000
Required ending Inventory (50% of Following month Production Needs)	176700	114850	58950	58950
Opening Inventory of Gilden	98450	176700	114850	98450
Quantity of Gilden to be Purchased	275150	291550	173800	740500

Solution 5:

Computation of cost of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Quantity of Gilden to be Purchased	275150	291550	173800	740500
Cost per unit	$0.80	$0.80	$0.80	$0.80
Cost of Raw Material Purchase	$220,120.00	$233,240.00	$139,040.00	$592,400.00

Solution 6:

Computation of expected cash disbursement for Raw Material
Particulars	July	August	September	Total
Cost of Raw Material Purchase	$220,120.00	$233,240.00	$139,040.00	$592,400.00
Cash disbursement (50% in month of purchase and 50% in following month):
Cash disbursement for June Accounts payable	$72,920.00			$72,920.00
Cash disbursement for July Purchases	$110,060.00	$110,060.00		$220,120.00
Cash disbursement for August Purchases		$116,620.00	$116,620.00	$233,240.00
Cash disbursement for September Purchases			$69,520.00	$69,520.00
Total Expected Cash disbursement for Raw Material	$182,980.00	$226,680.00	$186,140.00	$595,800.00