Question

The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2017 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2017

Assets

Current Assets:

   Cash                                                                                            $ 39,000

   Accounts Receivable                                                                    40,000

   Raw Materials Inventory                                                               2,400

   Finished Goods Inventory                                                             8,700

   Total Current Assets                                                                                               $ 90,100

Property, Plant and Equipment:

   Equipment                                                                                  177,000

   Less: Accumulated Depreciation                                            (42,000)                135,000

Total Assets                                                                                                                $225,100

Liabilities

Current Liabilities:

   Accounts Payable                                                                                                   $ 8,000

Stockholder’s Equity

Common Stock, no par                                                            $ 130,000

Retained Earnings                                                                          87,100

   Total Stockholder’s Equity                                                                                   217,100

Total Liabilities and Stockholder’s Equity                                                          $225,100

Other data for Grilton Tire Company:

Budgeted Sales are 1,500 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 30% of total sales, with the remaining 70% of sales on account.

Finished Goods Inventory on December 31, 2017 consists of 300 tires at $29 each.

Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2019 are expected to be 2,300 tires and second quarter sales for 2019 are expected to be 2,500. FIFO inventory costing method is used.

Direct Materials cost is $8 per tire.

Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production.

Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.

Variable manufacturing overhead is $2 per tire produced.

Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.

Fixed selling and administrative expenses include $8,000 per quarter for salaries; $1,800 per quarter for rent; $1,200 per quarter for insurance; and $500 per quarter for depreciation.

Variable selling and administrative expenses include supplies at 2% of sales.

Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale. The December 31, 2017 Accounts Receivable ($40,000) is received in the first quarter of 2018.

Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter. The December 31, 2017 Accounts Payable ($8,000) is paid in the first quarter of 2018.

Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.

Grilton desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter. Interest must be paid at the beginning of each quarter.

What types of information do your budgets yield? Is cash flow adequate? Do sales need to be increased, costs reduced? Etc….. ( 5 pts.)

Answer 1

Master budget

Sales budget

	Q1	Q2	Q3	Q4
Sales forecast (units)	1500	1700	1900	2100
Sales ($)@$50 each	75000	85000	95000	105000
Cash sales @30%	22500	25500	28500	31500
Sales on account @70%	52500	59500	66500	73500
Receipts of Account sales
In the same quarter	31500	35700	39900	44100
In the following quarter	40000	21000	23800	26600
Total collection (cash sales+ credit sale)	94000	82200	92200	102200

Production budget

	Q1	Q2	Q3	Q4	2019 Q1	2019 Q2
Sales	1500	1700	1900	2100	2300	2500
Closing finished Goods@40%	680	760	840	920	1000
Less: opening inventory	300	680	760	840	920
Production budget	1880	1780	1980	2180	2380

Raw materials budget

	Q1	Q2	Q3	Q4	2019 Q1	2019 Q2
Production	1880	1780	1980	2180	2380
Closing raw material	534	594	654	714
Opening raw material	300	534	594	654
Direct Material Purchase	2114	1840	2040	2240
Purchase cost @$8	16912	14720	16320	17920

Payments made for the raw material purchase

	Q1	Q2	Q3	Q4
Payment made in same qtr	11838	10304	11424	12544
Payment made in the following quarter	8000	5074	4416	4896
Total payments made	19838	15378	15840	17440

Cash requirement budget

	Q1	Q2	Q3	Q4
Opening balance + Borrowings	39000	9590 + 26000	44480	51638
Sales receipts	94000	82200	92200	102200
Total cash balance available	133000	117790	136680	153838
Repayment			9000 [44480-35000] s.t 1000 installment	16000 [51638-35000]s.t 1000 installment
Less: interest payments@6%p.a			390	255
Capital expenditure	45000
Payment for Purchases	19838	15378	15840	17440
Direct labour exp @0.40 per hr @16 per hour	12032	11392	12672	13592
Variable manufacturing exp	3760	3560	3960	4360
Fixed admn exp	26780	26780	26780	26780
Fixed selling exp	11000	11000	11000	11000
Variable selling exp	1500	1700	1900	2100
Income tax exp	3500	3500	3500	3500
Total payments	123410	73310	76042	79027
Balance	9590	44480	51638	58811

This master budget lays out the whole scenario regarding the cash outflows and cash inflows during the whole year based on the estimates. This shows the cash excess /deficit during the year which in turn leads to the requirement of borrowing the funds.

1. When the capital expenditure have been paid in cash, it lead to funds crunch.

2. In other quarters there are adequate funds available based on given estimates.

3. Capital expenditure could have been financed as there is no cash available for carrying out regular activities.

4. Expenses can be reduced but it should not rise upon the given level.

5. Sales can be managed based on Demand in the market. Sales price increase is not suggested as it may lead to fall in the sales qty thereby creating deficit in the funds for the enterprise.

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