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.)

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

Prepare a direct materials budget for each quarter and in total for the year 2017. (10 pts.)

Answer 1

Grilton Tire Company
Sales Budget
For the Quarters and Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total 2017
Budgeted Sales in Units	1,600	1,800	2,000	2,200	7,600
Selling Price	50.00	50.00	50.00	50.00	50.00
Budgeted Sales Value	80,000.00	90,000.00	100,000.00	110,000.00	380,000.00
Cash Sales (20%)	16,000.00	18,000.00	20,000.00	22,000.00	76,000.00
Credit Sales (80%)	64,000.00	72,000.00	80,000.00	88,000.00	304,000.00

Grilton Tire Company
Expected Cash Collection
For the Quarters and Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total 2017
Collection from Cash Sales	16,000.00	18,000.00	20,000.00	22,000.00	76,000.00
Credit Sales	64,000.00	72,000.00	80,000.00	88,000.00	304,000.00
Collection from Credit Sales
Accounts Receivable dec 31 2016	40,000.00				40,000.00
1st Quarter	38,400.00	25,600.00			64,000.00
2nd Quarter		43,200.00	28,800.00		72,000.00
3rd Quarter			48,000.00	32,000.00	80,000.00
4th Quarter				52,800.00	52,800.00
Total Collections from Credit Sales	78,400.00	68,800.00	76,800.00	84,800.00	308,800.00
Expected Cash Collection from Sales	94,400.00	86,800.00	96,800.00	106,800.00	384,800.00

Grilton Tire Company
Production Budget
For the Quarters and Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total 2017
Budgeted Sales in Units	1,600	1,800	2,000	2,200	7,600
Add: Desired End Inventory	720	800	880	960	960
Inventory required	2,320	2,600	2,880	3,160	8,560
Less : Opening Inventory	300	720	800	880	300
Inventory to be produced	2,020	1,880	2,080	2,280	8,260

Production Budget	1st Quarter 2018
Budgeted Sales in Units	2400
Add: Desired End Inventory	1040
Inventory required	3440
Less : Opening Inventory	960
Inventory to be produced	2480

Grilton Tire Company
Direct Materials Budget
For the Quarters and Year 2017
	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total 2017
Units to be produced	2,020	1,880	2,080	2,280	8,260
Direct Materials Cost per unit	8	8	8	8	8
direct materials cost	16,160	15,040	16,640	18,240	66,080
Add: Ending Inventory to be maintained	4,512	4,992	5,472	5,952	5,952
Less: Opening Direct Material Cost	2,400	4,512	4,992	5,472	2,400
Total Direct Material Cost	18,272	15,520	17,120	18,720	69,632