Question

Star Company manufactures swimming equipment used by divers. Management is now preparing detailed budget for July and August, and has assembled the following information to assist in preparing the budget. (a) The Marketing Department has estimated sales as follows for the reminder of the year. The selling price of the equipment is $50 per unit. All sales are on account. July (Projected) 6,000 units August (Projected) 7,000 units September (Projected) 5,000 units October (Projected) 4,000 units (b) All sales are on account. Based on past experience, sales are expected to be collected in the following pattern: 40% in the month of sale 50% in the month following sale 10% uncollectable The beginning account receivable balance (including uncollectable amounts) on July 1 will be $120,000 (c) The desired ending finished goods inventory for each month is 10% of the following month’s sales. The inventory of finished goods on July 1 will be 600 units. (d) Each unit requires 2 kilograms of materials to produce. To prevent shortages, the company would like the inventory of this material on hand at the end of each month to be equal to 20% of the following month’s sales needs. Material costs are $2.50 per kilogram. Star Company pays for 60% of its purchases in the month of purchase, the remainder is paid for in the following month. The accounts payable balance for material purchases will be $11,400 on July 1. Required: Prepare the following for July and August (a) Production budget in units (b) Direct materials budget in kilograms and dollars (c) A schedule of expected cash collections (d) A schedule of expected cash disbursements for materials (e) How can sensitivity analysis be used to increase the benefits of budgeting? Explain

Answer 1

Desired production ending inventory = 10% of next month sales
Desired unit of material in Ending inventory = 20% of next month sales
Receipts from June
Accounts Receivable Balance on 1 July including uncollectibles = 120,000
60% of x = 120,000
x = $ 200,000
50% of x = $100,000