Question

The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget:

	Year 2 Quarter					Year 3 Quarter
Data	1	2	3	4		1	2
Budgeted unit sales	50,000	65,000	110,000	65,000		85,000	100,000
Selling price per unit	$7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 Chapter 8: Applying Excel Data Year 3 Quarter 1 2 3 4 1 2 Budgeted unit sales 50,000 65,000 110,000 65,000 85,000 100,000 • Selling price per unit $7 per unit • Accounts receivable, beginning balance $65,000 • Sales collected in the quarter sales are made 75% • Sales collected in the quarter after sales are made 25% • Desired ending finished goods inventory is 30% of the budgeted unit sales of the next quarter • Finished goods inventory, beginning 12,000 units • Raw materials required to produce one unit 5 pounds • Desired ending inventory of raw materials is 10% of the next quarter's production needs • Raw materials inventory, beginning 23,000 pounds • Raw material costs $0.80 per pound • Raw materials purchases are paid 60% in the quarter the purchases are made and 40% in the quarter following purchase • Accounts payable for raw materials, beginning balance $81,500

a. What are the total expected cash collections for the year under this revised budget?

b. What is the total required production for the year under this revised budget?

c. What is the total cost of raw materials to be purchased for the year under this revised budget?

d. What are the total expected cash disbursements for raw materials for the year under this revised budget?

e. After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 80,000 units in any one quarter. Is this a potential problem?

• Yes

• No

Answer 1

Solution a:

Schedule of expected cash collection
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts receivables beginning	$65,000.00				$65,000.00
Cash received for Q1 Sale	$262,500.00	$87,500.00			$350,000.00
Cash received for Q2 Sale		$341,250.00	$113,750.00		$455,000.00
Cash received for Q3 Sale			$577,500.00	$192,500.00	$770,000.00
Cash received for Q4 Sale				$341,250.00	$341,250.00
Budgeted Cash Collection	$327,500.00	$428,750.00	$691,250.00	$533,750.00	$1,981,250.00

Solution b:

Production Budget
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year	Quarter 1, next year
Budgeted sales unit	50000	65000	110000	65000	290000	85000
Add: ending inventory (30% of next quarter sales)	19500	33000	19500	25500	25500	30000
Less: Beginning inventory	12000	19500	33000	19500	12000	25500
Estimated production unit	57500	78500	96500	71000	303500	89500

Solution c:

Budgeted Cost of raw material purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Budgeted Production units	57500	78500	96500	71000	303500
Raw material per unit (In Pounds)	5	5	5	5	5
Total requirement of raw materials	287500	392500	482500	355000	1517500
Add: Desired ending inventory (10% of next quarter production needs)	39250	48250	35500	44750	44750
Less: Beginning inventory	23000	39250	48250	35500	23000
Budgeted purchase units of raw material (In Pounds)	303750	401500	469750	364250	1539250
Raw material cost per pound	$0.80	$0.80	$0.80	$0.80	$0.80
Budgeted cost of purchases	$243,000.00	$321,200.00	$375,800.00	$291,400.00	$1,231,400.00

Solution d:

Schedule of expected cash disbursement for merchandise purchases
Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Accounts Payable, Beginning	$81,500.00				$81,500.00
Q1 Purchases	$145,800.00	$97,200.00			$243,000.00
Q2 Purchases		$192,720.00	$128,480.00		$321,200.00
Q3 Purchases			$225,480.00	$150,320.00	$375,800.00
Q4 Purchases				$174,840.00	$174,840.00
Total payments	$227,300.00	$289,920.00	$353,960.00	$325,160.00	$1,196,340.00

Solution e:

Yes, this a potential problem as production budget of Q3 requires production greater than 80000 units.