Question

Oceanview Inc. will start producing "Bart Simpson Surfboards" in April. Production and sales for the first 4-month production run are budgeted as follows:

Month: Budgeted Production: Budgeted Sales:

April 4500 3000

May 4800 3600

June 5400 4800

July 5100 6000

Each unit requires $9 of direct materials. The company plans to have an ending inventory of materials each month equal to 40 percent of next month's production requirement. Seventy-five percent of material purchases are paid in the month of purchase and the remaining 25 percent in the following month.

Selling price of the product is $18 per unit. Thirty percent of sales are expected to be for cash. Thirty-five percent of sales are expected to be collected in the month of sale, and the remainder in the following month.

Required:

a. Prepare a material purchases budget for April, May, and June.

b. Determine the cash requirements for payment of material purchases for April, May, and June.

c. Determine the amount of cash that will be generated by sales in revenue in April, May, and June.

Answer 1

a. Material purchases budget for April, May, and June.
	Apr	May	Jun
Budgeted Production	4500	4800	5400
Direct Material Per Unit	9	9	9
Required Direct material	40500	43200	48600
Add: Required Closing Stock	17280	19440	19440
Total Requirement	57780	62640	68040
Less: Opening Sock	-16200	-17280	-19440
Required Purchase	41580	45360	48600
Direct Material Rate Per Unit	9	9	9
Purchases $	374220	408240	437400
b. Cash requirements for payment of material purchases for April, May, and June
	Apr	May	Jun
Purchases $	374220	408240	437400
Payments:
For Apr	280665	93555
For May		306180	102060
For Jun			328050
Total Payments	280665	399735	430110
c. Amount of cash that will be generated by sales in revenue in April, May, and June
	Apr	May	Jun
Sales Units	3000	3600	4800
Sale Price per unit	18	18	18
Sales $	54000	64800	86400
Cash Sales 30%	16200	19440	25920
Credit Sales 70%	37800	45360	60480
Collections:
Cash Sales	16200	19440	25920
For Credit Sales Apr	13230	24570
For Credit Sales May		15876	29484
For Credit Sales June			21168
Total Collection	29430	59886	76572