Question

Requirement 2:

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:

  

Data	Year 2 Quarter				Year 3 Quarter
	1	2	3	4	1	2
Budgeted unit sales	45,000	70,000	110,000	70,000	85,000	90,000
Selling price per unit	$7	per unit

Data	Year 2 Quarter				Year 3 Quarter
	1	2	3	4	1	2
Budgeted Unit Sales	45,000	70,000	110,000	70,000	85,000	90,000
selling price per unit	$8 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 materials cost	$0.80
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

What are the total expected cash collections for the year under this revised budget? What is the total required production for the year under this revised budget? What is the total cost of raw materials to be purchased for the year under this revised budget? What are the total expected cash disbursements for raw materials for the year under this revised budget? 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?

Answer 1

Solution 1:

Computation of Expected Cash collection for the year under revised budget
Particulars	Q1	Q2	Q3	Q4	Year
Budgeted Sales	$315,000.00	$490,000.00	$770,000.00	$490,000.00	$2,065,000.00
Collection of cash against sales (75% same quarter, 25% next quarter):
Cash collection of opening accounts receivables	$65,000.00				$65,000.00
Cash collection of Q1 Sales	$236,250.00	$78,750.00			$315,000.00
Cash collection of Q2 Sales		$367,500.00	$122,500.00		$490,000.00
Cash collection of Q3 Sales			$577,500.00	$192,500.00	$770,000.00
Cash collection of Q4 Sales				$367,500.00	$367,500.00
Total Expected Cash Collection	$301,250.00	$446,250.00	$700,000.00	$560,000.00	$2,007,500.00

Solution 2:

Production Budget
Particulars	Q1	Q2	Q3	Q4	Year 2	Q1 - Year 3
Budgeted Sales units	45000	70000	110000	70000	295000	85000
Add: Desired ending inventory (30% of next quarter sale)	21000	33000	21000	25500	25500	27000
Less: Beginning inventory	12000	21000	33000	21000	12000	25500
Budgeted production units	54000	82000	98000	74500	308500	86500

Solution 3:

Budgeted cost of raw material to be purchased
Particulars	Q1	Q2	Q3	Q4	Year
Budgeted Production units	54000	82000	98000	74500	308500
Raw material requirement per unit (In Pound)	5	5	5	5	5
Total needs of raw material (In Pound)	270000	410000	490000	372500	1542500
Add: Desired ending inventory of raw material (10% of next quarter prodcution needs)	41000	49000	37250	43250	43250
Less: Beginning inventory	23000	41000	49000	37250	23000
Budgeted raw material purchase units (In Pound)	288000	418000	478250	378500	1562750
Raw material cost per pound	$0.80	$0.80	$0.80	$0.80	$0.80
Budgeted cost of raw material purchase	$230,400.00	$334,400.00	$382,600.00	$302,800.00	$1,250,200.00

Solution 4:

Computation of Expected Cash disbursement for the year under revised budget
Particulars	Q1	Q2	Q3	Q4	Year
Budgeted Purchases	$230,400.00	$334,400.00	$382,600.00	$302,800.00	$1,250,200.00
Paymnet of cash against Purchases (60% same quarter, 40% next quarter):
Cash Payment of opening accounts payable	$65,000.00				$65,000.00
Cash Payment of Q1 Purchase	$138,240.00	$92,160.00			$230,400.00
Cash Payment of Q2 Purchase		$200,640.00	$133,760.00		$334,400.00
Cash Payment of Q3 Purchase			$229,560.00	$153,040.00	$382,600.00
Cash Payment of Q4 Purchase				$181,680.00	$181,680.00
Total Expected Cash Payments	$203,240.00	$292,800.00	$363,320.00	$334,720.00	$1,194,080.00

Solution 5:

As complex milling machine plant can produce no more than 80000 units in any quarter, for the year 2 this is not a big problem as we have available demand more than 80000 units in quarter 3 and we have demande less than 80000 in Q1 and Q2, therefore company may produce extra to meet the demand of Q3. However this will become a big problem if in future demande will increase more than 80000 in each quarter.