Question

Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 0.75 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May.

The following information is available:

• The company budgeted sales at 600,000 units per month in April, June, and July and at 500,000 units in May. The selling price is $4 per unit.
• The inventory of finished goods on April 1 was 150,000 units. The finished goods inventory at the end of each month equals 25 percent of sales anticipated for the following month. There is no work in process.
• The inventory of raw materials on April 1 was 57,500 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 69,500 pounds per shipment.
• Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $2,000 per month on office furniture and fixtures, total $155,000 per month.
• The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:

Materials (0.25 pound per tile, 125,000 pounds, $4 per pound)	$	500,000
Labor		380,000
Variable overhead		210,000
Fixed overhead (includes depreciation of $200,000)		390,000
Total	$	1,480,000

Required:

a. Prepare schedules computing inventory budgets by months for

1. Production in units for April, May, and June. (Do not round intermediate calculations.)

  

   

2. Raw materials purchases in pounds for April and May. (Do not round intermediate calculations.)

  

    

b. Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. When calculating net sales assume cash discounts of 1 percent and bad debt expense of 0.50 percent. (Do not round intermediate calculations.)

Answer 1

a
1	Production in Units
		April	May	June
	Budgeted Sales	6,00,000	5,00,000	6,00,000
	Inventory Required at end of the month	1,25,000	1,50,000	1,50,000
	Total Needs	7,25,000	6,50,000	7,50,000
	Less : Inventory on hand at beginning of the month	1,50,000	1,25,000	1,50,000
	Production in Units	5,75,000	5,25,000	6,00,000
Working	Add : Desired Ending inventory	=500000*25%	=600000*25%	=600000*25%
2	Raw Material Purchase
		April	May
	Budgeted Production needs in pounds	1,43,750	1,31,250
	Inventory required at end of month	52,500	60,000
	Total pound needs	1,96,250	1,91,250
	Less : Inventory on hand at beginning of the month	57,500	52,500
	Balance Required to Purchase	1,38,750	1,38,750
	Budgeted Purchase- pounds	1,39,000	1,39,000
Working	Raw Material Purchase
		April	May	June
	Production Units	5,75,000	5,25,000	6,00,000
	Raw Material per unit	0.25	0.25	0.25
	Total pound needs	1,43,750	1,31,250	1,50,000
	Add : Ending Inventory	52,500	60,000
	Less : Beginning Inventory	57,500	52,500
	Balance Required to Purchase	1,38,750	1,38,750
	Pounds per Shipment	69,500	69,500
	Budgeted Purchase	1,39,000	1,39,000
b	Projected Income Statement
	Sales Revenue		20,00,000
	Cash Discount on sales	20,000
	Estimated Bad Debts	10,000	30,000
	Net Sales		19,70,000
	Cost of sales :
	Variable Cost	10,90,000
	Fixed Cost	3,90,000	14,80,000
	Gross Profit on sales		4,90,000
	Expenses :
	Sellimg Expenses	2,00,000
	Administrative Expenses	1,55,000
	Interest Expenses	3,750	3,58,750
	Operating Profit		1,31,250