Question

Problem 13-53 & 13-54 (Algo) (LO 13-4, 5, 6)

[The following information applies to the questions displayed below.]

Gulf States Manufacturing has the following data from year 1 operations, which are to be used for developing year 2 budget estimates:

Sales revenues (18,000 units)	$	1,620,000
Manufacturing costs
Materials	$	289,000
Variable cash costs		395,000
Fixed cash costs		159,000
Depreciation (fixed)		195,000
Marketing and administrative costs
Marketing (variable, cash)		208,000
Marketing depreciation		51,000
Administrative (fixed, cash)		204,000
Administrative depreciation	$	18,000
Total costs	$	1,519,000
Operating profits	$	101,000

All depreciation charges are fixed. Old manufacturing equipment with an annual depreciation charge of $16,150 will be replaced in year 2 with new equipment that will incur an annual depreciation charge of $22,600. Sales volume and prices are expected to increase by 10 percent and 6 percent, respectively. On a per-unit basis, expectations are that materials costs will increase by 8 percent and variable manufacturing costs will decrease by 2 percent. Fixed cash manufacturing costs are expected to decrease by 6 percent.

Variable marketing costs will change with volume. Administrative cash costs are expected to increase by 6 percent. Inventories are kept at zero. Gulf States operates on a cash basis.

Required: Prepare a budgeted income statement for year 2. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amounts.)

GULF STATES MANUFACTURING

Budgeted Income Statement

For Year 2

Sales Revenue	$
Manufacturing Costs:
Materials	$
Other Variable Costs	$
Fixed Cash Costs	$
Depreciation	$
Total Manufacturing Costs	$
Marketing and Admin Costs:
Marketing (Variable, Cash)	$
Marketing Depreciation	$
Administrative (fixed, cash)	$
Administrative Depreciation	$
Total Marketing and Admin Costs	$
Total Costs	$
Operating Costs	$

Answer 1

	Year 1	Year 2 (Budgeted)
	Total	Per unit	Total	Per unit
Sales volume (in units)	18000		19800
Sales revenue	$1,620,000	$90.00	$1,888,920	$95.40
Manufacturing costs:
Materials	$289,000	$16.06	$343,332	$17.34
Variable cash costs	$395,000	$21.94	$425,810	$21.51
Fixed cash costs	$159,000	$8.83	$149,460	$7.55
Depreciation (Fixed)	$195,000	$10.83	$201,450	$10.17
Marketing and administrative costs:
Marketing(variable,cash)	$208,000	$11.56	$228,800	$11.56
Marketing depreciation	$51,000	$2.83	$51,000	$3
Administrative(fixed,cash)	$204,000	$11.33	$216,240	$10.92
Administrative depreciation	$18,000	$1.00	$18,000	$1
Total costs	$1,519,000	$84.39	$1,634,092	$82.72
Operating profits	$101,000	$5.61	$254,828	$12.68

Working notes:

1. All depreciation charges are fixed. So, for Year 2, marketing depreciation and administrative depreciation remain same as Year 1.

2. However, manufacturing depreciation changes as old manufacturing equipment is replaced with new equipment. So, additional depreciation will be difference in depreciation of new and old equipment, i.e., $22,600 - $16,150. So, $6,450 will be added to old depreciation to get Year 2 manufacturing depreciation as $201,450.

3. Sales volume increases by 10%, so Year 2 sales volume = 18000 * 1.1 = 19,800 units. Sale price increases by 6%. For calculation purpose, Year 1 per unit is calculated for all – sales and all costs. So, sale price in Year 2 = $90 * 1.06 = $95.40. Total sales revenue = 19,800 * $95.40 = $1,888,920.

4. Per unit material cost in Year 2 = $16.06 * 1.08 = $17.34 . Per unit variable cash costs decrease by 2%. So, per unit variable cash costs in Year 2 = $21.94 * 0.98 = $21.51

5. Fixed cash manufacturing costs are expected to decrease by 6%. So, Year 2 fixed cash manufacturing costs = $159,000 * 0.94 = $149,460.

6. Variable marketing costs will change with volume, which means they are fixed per unit. So Year 2 Variable marketing costs = $11.56 * 19,800

7. Administrative cash costs are expected to increase by 6%. So, Year 2 administrative cash costs = $204,000 * 1.06 = $216,240.

8. So, total estimated costs for Year 2 add up to $1,634,092 and total estimated revenue = $1,888,920. So, budgeted operating profits for Year 2 = $1,888,920 - $1,634,092 = $254,828.