Question

Patrick and Bob started My My Baby two years ago to produce baby furniture, such as: cribs, closets, changing tables etc. Bob, as the CFO, would like to start creating a budget for My My Baby for performance management purposes and cash flow assessments. This is the first time that My My Baby is going through a budget process, hence, Bob engaged you as their accountant to build the budget package for the year 2020. After your interview with Bob, you have collected the following information:

• Sales has been steadily increasing over the last two years. My My Baby has two key product lines: My Little Sunshine, the simple and classic line of baby cribs; and My Boss Baby, a high-end and premium line of baby cribs.

• Historical sales units for the last two years are list below. Bob expects 2020's sale to continue to increase steadily at the same rate.

In Units 2018 2019

My Little Sunshine 10,000 12,000

My Boss Baby 4,000 5,000

• My My Baby has a gross margin of 25% on gross sales for both lines. •

The selling price per unit for My Little Sunshine and My Boss Baby are $250 and $450 respectively.

• 20% of sales are for cash.

The remaining sales are credit sales. Collections are expected to be 50% within the year and 2% is uncollectible. No AR is expected to be outstanding at the end of 2019.

• Bob would like to always keep inventory equals to 20% of prior period sales on hand for each product line. The ending inventory of 2019 is expected to be 1,400 units for My Little Sunshine and 800 units for My Boos Baby.

• Other expenses budgeted by My My Baby are listed below:

Production Supervisor: 100,000

Depreciation - Office: 350,000

Rent - Warehouse: 500,000

Rent - Factory: 700,000

Marketing: 100,000

Factory Insurance: 98,000

Patrick and Bob's Salaries: 250,000

QA labour hours: 78,000

Factory Utilities: 100,000

Manufacturing supplies: 5,000

• All purchases and expenses are initially paid by credit. 90% of the annual expenses are expected to paid within the year.

• The tax rate for My My Baby is 27%.

1) Prepare Budgeted Operating Income Statement in good form with the following supporting schedules

A. Sales budget

B. Production budget

C. Factory overhead budget

D. Selling & Administrative Expense Budget

2) Patrick would like to develop a new line of changing tables of My My Baby. The expected up front investment is $2 million. Should My My Baby invest based on the current financial situation? (hint: cash flow) What is the risk of relying on this budget? What do you suggest for My My Baby to do to mitigate this?

Answer 1

A.

Sales Budget For 2020
	Sales Volume	Unit Selling Price	Total Sales Revenue
Little Miss Sunshine	14,400	$ 250	$ 3,600,000
My Boss Baby	6,250	450	2,812,500
			$ 6,412,500

B.

Production Budget For 2020
	Little Miss Sunshine	My Boss Baby
Budgeted sales in units	14,400	6,250
Add: Desired ending finished goods inventory	2,400	1,000
Total needs	16,800	7,250
Less: Beginning finished goods inventory	1,400	800
Required production in units	15,400	6,450

C.

Factory Overhead Budget For 2020
Production supervisor salary	$ 100,000
Rent: factory	700,000
Factory insurance	98,000
QA labor cost	78,000
Factory utilities	100,000
Manufacturing supplies	5,000
Total factory overhead cost	$ 1,081,000

D.

Selling and Administrative Expense Budget For 2020
Depreciation : Office	$ 350,000
Rent: Warehouse	500,000
Marketing	100,000
Salaries	250,000
Budgeted Selling and Administrative Expenses	$ 1,200,000

1.

Budgeted Income Statement For 2020
Sales Revenue	$ 6,412,500
Less: Cost of Goods Sold	4,809,375
Gross Margin	1,603,125
Selling and Administrative Expenses	1,200,000
Income before taxes	403,125
Income tax @ 27 %	108,844
Net Income	294,281