Question

Problem 8-30 (Static) Integration of the Sales, Production, and Direct Materials Budgets [LO8-2, LO8-3, LO8-4]

Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	30,000	October	20,000
August	70,000	November	10,000
September	50,000	December	10,000

The selling price of the beach umbrellas is $12 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $300,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.

4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30	72,000	feet
September 30	?	feet

5. Gilden costs $0.80 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $76,000.

Required:

1. Calculate the estimated sales, by month and in total, for the third quarter.

2. Calculate the expected cash collections, by month and in total, for the third quarter.

3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Answer 1

Solution 1:
Milo Company - Computation of Estimated Sales for 3rd Quarter
Particulars	July	August	September	Total
Sales in Units	30000	70000	50000	150000
Selling Price per unit	$12.00	$12.00	$12.00	$12.00
Estimated Sales	$360,000.00	$840,000.00	$600,000.00	$1,800,000.00

Solution 2:
Milo Company - Computation of Estimated Cash Collection for 3rd Quarter
Particulars	July	August	September	Total
Accounts receivables, June 30	$195,000.00			$195,000.00
July Sales	$108,000.00	$234,000.00		$342,000.00
August Sales		$252,000.00	$546,000.00	$798,000.00
September sales			$180,000.00	$180,000.00
Total Cash collection	$303,000.00	$486,000.00	$726,000.00	$1,515,000.00

Solution 3:
Milo Company - Computation of Estimated Production of Beach Umbrellas
Particulars	July	August	September	October
Sales in Units	30000	70000	50000	20000
Required ending Inventory (15% of Following month Sale)	10500	7500	3000	1500
Total Needs	40500	77500	53000	21500
Opening Inventory	4500	10500	7500	3000
Estimated Production (Sales + Ending Inventory - Opening Inventory)	36000	67000	45500	18500
Solution 4:
Milo Company - Computation of quantity of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Estimated Production	36000	67000	45500	148500
Required qty of Gilden per unit (In feet)	4	4	4	4
Total requirement of Gilden	144000	268000	182000	594000
Required ending Inventory (50% of Following month Production Needs)	134000	91000	37000	37000
Total units of raw materials needed	278000	359000	219000	631000
Opening Inventory of Gilden	72000	134000	91000	72000
Quantity of Gilden to be Purchased	206000	225000	128000	559000
Solution 5:
Milo Company - Computation of cost of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Quantity of Gilden to be Purchased	206000	225000	128000	559000
Cost per unit	$0.80	$0.80	$0.80	$0.80
Cost of Raw Material Purchase	$164,800.00	$180,000.00	$102,400.00	$447,200.00
Solution 6:
Milo Company - Computation of expected cash disbursement
Particulars	July	August	September	Total
Accounts Payable, June 30	$76,000.00			$76,000.00
July Purchases	$82,400.00	$82,400.00		$164,800.00
August Purchases		$90,000.00	$90,000.00	$180,000.00
September Purchases			$51,200.00	$51,200.00
Total Cash disbursements	$158,400.00	$172,400.00	$141,200.00	$472,000.00