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, 2016 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2016

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 1,600 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 20% of total sales, with the remaining 80% of sales on account.

Finished Goods Inventory on December 31, 2016 consists of 300 tires at $29 each.

Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2018 are expected to be 2,400 tires and second quarter sales for 2018 are expected to be 2,600. 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 0.25 hours of direct labor; direct labor costs average $16 per hour.

Variable manufacturing overhead is $3 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 $50,000 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; December 31, 2016, Accounts Receivable is received in the first quarter of 2017.

Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2016, Accounts Payable is paid in the first quarter of 2017.

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

Income tax expense is projected at $4,500 per quarter and is paid in the quarter incurred.

Grilton desires to maintain a minimum cash balance of $39,000 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.

REQUIREMENTS:

Prepare a sales budget in units and dollars for each quarter and in total for the year 2017.      (5 pts.)

Prepare a schedule of expected cash collections for each quarter and in total for the year 2017.   (10 pts.)

Answer 1

Solution:

Part 1 --- Sales budget in units and dollars for 2017

Sales Budget for 2017
	Quarter				Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Expected Units of tires to be sold	1600	1800	2000	2200	7600
Unit Selling Price	$50	$50	$50	$50	$50
Budgeted Sales in dollars	$80,000	$90,000	$100,000	$110,000	$380,000

Part 2 --- Schedule of expected cash collections for each quarter and in total for the year 2017

Schedule of Expected Cash Collection
	Quarter				Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Cash Sales (20% of total sales of each quarter)	$16,000 (80,000*20%)	$18,000 (90,000*20%)	$20,000 (100,000*20%)	$22,000 (110,000*20%)	$76,000
Collection from on account sales:
Beginning Accounts Receivable	$40,000				$40,000
1st Quarter on account sales	$38,400 (80,000*80% on account * 60%)	25600 (80,000*80% on account * 40%)			$64,000
2nd Quarter on account sales		$43,200 (90,000*80% on account * 60%)	28800 (90,000*80% on account * 40%)		$72,000
3rd Quarter on account sales			48000 (100,000*80% on account *60%)	$32,000 (100,000*80% on account *40%)	$80,000
4rth Quarter on account sales				$52,800 (110,000*80% on account *60%)	$52,800
Total Budgeted Cash Collections	$94,400	$86,800	$96,800	$106,800	$384,800

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