Question

Problem 8-30 (Algo) Integration of the Sales, Production, and Direct Materials Budgets [LO8-2, LO8-3, LO8-4]

Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	40,000	October	30,000
August	90,000	November	16,500
September	59,000	December	17,000

The selling price of the beach umbrellas is $11 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $429,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.

4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30	95,000	feet
September 30	?	feet

5. Gilden costs $0.60 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $51,990.

Required:

1. Calculate the estimated sales, by month and in total, for the third quarter.

2. Calculate the expected cash collections, by month and in total, for the third quarter.

3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Answer 1

Solution 1:
Milo Company - Computation of Estimated Sales for 3rd Quarter
Particulars	July	August	September	Total
Sales in Units	40000	90000	59000	189000
Selling Price per unit	$11.00	$11.00	$11.00	$11.00
Estimated Sales	$440,000.00	$990,000.00	$649,000.00	$2,079,000.00

Solution 2:
Milo Company - Computation of Estimated Cash Collection for 3rd Quarter
Particulars	July	August	September	Total
Accounts receivables, June 30	$278,850.00			$278,850.00
July Sales	$132,000.00	$286,000.00		$418,000.00
August Sales		$297,000.00	$643,500.00	$940,500.00
September sales			$194,700.00	$194,700.00
Total Cash collection	$410,850.00	$583,000.00	$838,200.00	$1,832,050.00

Solution 3:
Milo Company - Computation of Estimated Production of Beach Umbrellas
Particulars	July	August	September	October
Sales in Units	40000	90000	59000	30000
Required ending Inventory (15% of Following month Sale)	13500	8850	4500	2475
Total Needs	53500	98850	63500	32475
Opening Inventory	6000	13500	8850	4500
Estimated Production (Sales + Ending Inventory - Opening Inventory)	47500	85350	54650	27975
Solution 4:
Milo Company - Computation of quantity of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Estimated Production	47500	85350	54650	187500
Required qty of Gilden per unit (In feet)	4	4	4	4
Total requirement of Gilden	190000	341400	218600	750000
Required ending Inventory (50% of Following month Production Needs)	170700	109300	55950	55950
Total units of raw materials needed	360700	450700	274550	805950
Opening Inventory of Gilden	95000	170700	109300	95000
Quantity of Gilden to be Purchased	265700	280000	165250	710950
Solution 5:
Milo Company - Computation of cost of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Quantity of Gilden to be Purchased	265700	280000	165250	710950
Cost per unit	$0.60	$0.60	$0.60	$0.60
Cost of Raw Material Purchase	$159,420.00	$168,000.00	$99,150.00	$426,570.00
Solution 6:
Milo Company - Computation of expected cash disbursement
Particulars	July	August	September	Total
Accounts Payable, June 30	$51,990.00			$51,990.00
July Purchases	$79,710.00	$79,710.00		$159,420.00
August Purchases		$84,000.00	$84,000.00	$168,000.00
September Purchases			$49,575.00	$49,575.00
Total Cash disbursements	$131,700.00	$163,710.00	$133,575.00	$428,985.00