Question

Bramble Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow:

• Sales are budgeted at $370,000 for November, $350,000 for December, and $340,000 for January.
• Collections are expected to be 55% in the month of sale and 45% in the month following the sale.
• The cost of goods sold is 70% of sales.
• The company would like to maintain ending merchandise inventories equal to 60% of the next month's cost of goods sold. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $24,300.
• Monthly depreciation is $15,300.
• Ignore taxes.

Balance Sheet October 31
Assets
Cash	$	20,300
Accounts receivable		70,300
Merchandise inventory		155,400
Property, plant and equipment, net of $572,300 accumulated depreciation		1,094,300
Total assets	$	1,340,300
Liabilities and Stockholders' Equity
Accounts payable	$	254,300
Common stock		820,300
Retained earnings		265,700
Total liabilities and stockholders' equity	$	1,340,300

Expected cash collections in December are:

-

-

-

-

Sarafiny Corporation is in the process of preparing its annual budget. The following beginning and ending inventory levels are planned for the year.

	Beginning Inventory	Ending Inventory
Finished goods (units)	29,000	39,000
Raw material (grams)	59,000	49,000

Each unit of finished goods requires 2 grams of raw material. The company plans to sell 240,000 units during the year.

How much of the raw material should the company purchase during the year?

-

-

-

-

The Melville Corporation produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows:

Direct materials	$	15
Direct labor	$	12
Variable manufacturing overhead	$	8
Fixed manufacturing overhead	$	9
Variable selling expense	$	8
Fixed selling expense	$	3

The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Corporation to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order. Assume that direct labor is a variable cost.

Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. At what selling price for the 6,000 special order units would Melville be financially indifferent between accepting or rejecting the special order from Mowen?

Answer 1

1. Expected Cash Collection in December
= (55% of budgeted December sale) + (45% of budgeted November sales)
= (350000 x 55%) + (370000 x 45%)
= 166,500 + 192,500
= $ 359,000

2. Raw material required to be purchased

	Units
Budgeted sale of finished goods	240,000
Add: Ending Inventory	39,000
Less: Beginning Inventory	29,000
Units to be produced	250,000
Material required per unit (gms)	2
Material required for desired production (grams) (250000*2)	500,000
Add: Ending Inventory (grams)	49,000
Less: Beginning Inventory (grams)	59,000
Raw Material to be purchased (grams)	490,000

3. Indifferent selling price for special order

	Per unit	Total 6000 units
Variable costs:	($)	($)
Direct materials	15	90,000
Direct labor	12	72,000
Variable manufacturing overhead	8	48,000
Variable selling expense	8	48,000
Total variable cost	43	258,000
Fixed costs:
Purchase of special machine		9,000
Total Incremental costs		267,000

The total costs to produce 6,000 units of pongs for special order is $267,000. This would be the cost where Melville corporation would be financially indifferent for accepting or rejecting the order.