Question

ABC 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:

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

July	35,000	October	25,000
August	80,000	November	11,500
September	49,000	December	12,000

The selling price of the beach umbrellas is $13 per unit.

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 $377,000.

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.

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	83,500	feet
September 30	?	feet

Gilden costs $0.60 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 $42,990.

Required:

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

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

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

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

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

Answer 1

Solution 1:

ABC Company - Computation of Estimated Sales for 3rd Quarter
Particulars	July	August	September	Total
Sales in Units	35000	80000	49000	164000
Selling Price per unit	$13.00	$13.00	$13.00	$13.00
Estimated Sales	$455,000.00	$1,040,000.00	$637,000.00	$2,132,000.00

ABC Company - Computation of Estimated Cash Collection for 3rd Quarter
Particulars	June	July	August	September	Total
Estimated Sales	$377,000.00	$455,000.00	$1,040,000.00	$637,000.00	$2,541,000.00
Cash Collection (30% in month of sales and 65% in following month)		$381,550.00	$607,750.00	$867,100.00	$1,856,400.00

Solution 2:

ABC Company - Computation of Estimated Production of Beach Umbrellas
Particulars	July	August	September	October
Sales in Units	35000	80000	49000	25000
Required ending Inventory (15% of Following month Sale)	12000	7350	3750	1725
Opening Inventory	5250	12000	7350	3750
Estimated Production (Sales + Ending Inventory - Opening Inventory)	41750	75350	45400	22975

Solution 3:

ABC Company - Computation of quantity of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Estimated Production	41750	75350	45400	162500
Required qty of Gilder per unit (In feet)	4	4	4	4
Total requirement of Gilden	167000	301400	181600	650000
Required ending Inventory (50% of Following month Production Needs)	150700	90800	45950	45950
Opening Inventory of Gilden	83500	150700	90800	83500
Quantity of Gilden to be Purchased	234200	241500	136750	612450

Solution 4:

ABC Company - Computation of cost of Gilden to be purchased in 3rd quarter
Particulars	July	August	September	Total
Quantity of Gilden to be Purchased	234200	241500	136750	612450
Cost per unit	$0.60	$0.60	$0.60	$0.60
Cost of Raw Material Purchase	$140,520.00	$144,900.00	$82,050.00	$367,470.00

Solution 5:

ABC Company - Computation of expected cash disbursement
Particulars	July	August	September	Total
Cost of Raw Material Purchase	$140,520.00	$144,900.00	$82,050.00	$367,470.00
Cash disbursement (50% in month of purchase and 50% in following month)	$113,250.00	$142,710.00	$113,475.00	$369,435.00