Question

Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1.00 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May.

The following information is available:

• The company budgeted sales at 600,000 units per month in April, June, and July and at 500,000 units in May. The selling price is $4 per unit.
• The inventory of finished goods on April 1 was 150,000 units. The finished goods inventory at the end of each month equals 25 percent of sales anticipated for the following month. There is no work in process.
• The inventory of raw materials on April 1 was 43,125 pounds. At the end of each month, the raw materials inventory equals no less than 30 percent of production requirements for the following month. The company purchases materials in quantities of 63,500 pounds per shipment.
• Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $3,000 per month on office furniture and fixtures, total $160,000 per month.
• The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:

Materials (0.25 pound per tile, 125,000 pounds, $4 per pound)	$	500,000
Labor		380,000
Variable overhead		200,000
Fixed overhead (includes depreciation of $200,000)		390,000
Total	$	1,470,000

Required:

a-1. Prepare schedules computing inventory budgets by months for production in units for April, May, and June.
a-2. Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for April and May.

b. Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. When calculating net sales assume cash discounts of 1 percent and bad debt expense of 0.50 percent.

Answer 1

		April	May	June	July
	Beg. Inventory	150,000	125,000	150,000	150,000
	Budgeted Sales	600,000	500,000	600,000	600,000
1.a	End. Inventory	125,000	150,000	150,000
	Production	575,000	525,000	600,000
1.b	Budgeted production - (0.25 lb./Unit)	143,750	131,250	150,000
2		May
	Sales Units	500,000
	Sales	$ 2,000,000
	Estimated bad debts	$      10,000
	Variable cost per unit	$ 1,070,000
	Selling expenses	$    200,000
	Administrative expenses	$    160,000
	Interest expense	$         5,000
	Total Expenses	$ 1,445,000
	Profit	$    555,000

		April	May	June	July
	Beg. Inventory	150000	=C4	=D4	=E4
	Budgeted Sales	600000	500000	600000	600000
1.a	End. Inventory	=D3*25%	=E3*25%	=F3*25%
	Production	=C3+C4-C2	=D3+D4-D2	=E3+E4-E2
1.b	Budgeted production - (0.25 lb./Unit)	=C5*0.25	=D5*0.25	=E5*0.25
2		May
	Sales Units	500000
	Sales	=500000*4
	Estimated bad debts	=C10*0.5%
	Variable cost per unit	=(500000+380000+190000)/500000*500000
	Selling expenses	=C10*10%
	Administrative expenses	160000
	Interest expense	=500000*1%
	Total Expenses	=SUM(C11:C15)
	Profit	=C10-C16