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 1.00 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 550,000 units per month in April, June, and July and at 450,000 units in May. The selling price is $4 per unit.
• The inventory of finished goods on April 1 was 110,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process.
• The inventory of raw materials on April 1 was 66,250 pounds. At the end of each month, the raw materials inventory equals no less than 50 percent of production requirements for the following month. The company purchases materials in quantities of 67,500 pounds per shipment.
• Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $3,000 per month on office furniture and fixtures, total $165,000 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		400,000
Variable overhead		220,000
Fixed overhead (includes depreciation of $190,000)		420,000
Total	$	1,540,000

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

SOLUTION

A1. Schedule of Inventory Production-

Particulars	April	May	June
Budgeted sales	550,000	450,000	550,000
Add: Estimated ending inventory	90,000	110,000	110,000
Inventory required	640,000	560,000	660,000
Less: Beginning inventory	(110,000)	(90,000)	(110,000)
Units to be produced	530,000	470,000	550,000

*Estimated ending inventory= 20% of next months sales.

A2. Raw materials purchase budget-

Particulars	April	May	June
Units to be produced	530,000	470,000	550,000
Pounds required (0.25 per tile)	132,500	117,500	137,500
Add: Ending inventory of pounds	58,750	68,750
Total pounds required	191,250	186,250
Less: Beginning inventory of pounds	(66,250)	(58,750)
Pounds to be purchased	125,000	127,500
Pounds purchased per shipment	67,500	67,500
No. of shipments required	2	2
Total pounds purchsed	135,000	135,000

B. Income statement-

Particulars	Amount ($)
Sales ($450,000*$4)	1,800,000
Less: Cash discount (1%)	(18,000)
Less: Bad debts	(9,000)
Net sales	1,773,000
Cost of goods sold	(1,540,000)
Gross profit	233,000
Selling expenses (10%)	180,000
Depreciation	3,000
Other administrative expenses	162,000
Interest expenses ($500,000*1%)	5,000
Net income/ (loss)	233,000