Storm Tools has formed a new business unit to produce
battery-powered drills. The business unit was formed by the
transfer of selected assets and obligations from the parent
company. The unit's initial balance sheet on January 1 contained
cash ($500,000), plant and equipment ($2,500,000), notes payable to
the parent ($1,000,000), and residual equity ($2,225,000). The
business unit is expected to repay the note at $50,000 per month,
plus all accrued interest at 1/2% per month. Payments are made on
the last day of each month. The unit is scheduled to produce 25,000
drills during January, with an increase of 2,500 units per month
for the next three months. Each drill requires $40 of raw
materials. Raw materials are purchased on account, and paid in the
month following the month of purchase. The plant manager has
established a goal to end each month with raw materials on hand,
sufficient to meet 25% of the following month's planned production.
The unit expects to sell 20,000 drills in January; 25,000 in
February, 25,000 in March, and 30,000 per month thereafter. The
selling price is $100 per drill. Half of the drills will be sold
for cash through a website. The others will be sold to retailers on
account, who pay 40% in the month of purchase, and 60% in the
following month. Uncollectible accounts are not material. Each
drill requires 20 minutes of direct labor to assemble. Labor rates
are $24 per hour. Variable factory overhead is applied at $9 per
direct labor hour. The fixed factory overhead is $25,000 per month;
60% of this amount is related to depreciation of plant and
equipment. With the exception of depreciation, all overhead is
funded as incurred. Selling, general, and administrative costs are
funded in cash as incurred, and consist of fixed components
(salaries, $100,000; office, $40,000; and advertising, $75,000) and
variable components (15% of sales). Prepare a monthly comprehensive
budget plan for Storm's new business unit for January through
March. The plan should include the (a) sales and cash collections
budget, (b) production budget, (c) direct materials purchases and
payments budget, (d) direct labor budget, (e) factory overhead
budget, (f) ending finished goods budget (assume total factory
overhead is applied to production at the rate of $11.73 per direct
labor hour), (g) SG&A budget, and (h) cash budget.