Question

Requirement 2:

The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget:

  

Data	Year 2 Quarter				Year 3 Quarter
	1	2	3	4	1	2
Budgeted unit sales	50,000	70,000	105,000	75,000	80,000	90,000
Selling price per unit	$7	per unit

selling price per unit $8 per unit

Accounts receivable, beginning balance 65,000

Sales collected in the quarter sales are made  75 %

Sales collected in the quarter after sales are made 25%

Desired ending finished goods inventory is 30% of the budgeted unit sales of the next quarter

Finished goods inventory, beginning 12000 units

Raw materials required to produce one unit 5 pounds

Desired ending inventory of raw materials is  10 % of the next quarter's production needs

Raw materials inventory, beginning   23,000 pounds

Raw material costs   $0.80 per pound

Raw materials purchases are paid   60% in the quarter the purchases are made

and 40 % in the quarter following purchase

Accounts payable for raw materials, beginning balance   $81,500

a) What are the total expected cash collections for the year under this revised budget?

      

b.	What is the total required production for the year under this revised budget?

      

c.	What is the total cost of raw materials to be purchased for the year under this revised budget?

      

d.	What are the total expected cash disbursements for raw materials for the year under this revised budget?

     

Answer 1

a) Calculation of total expected cash collections for year 2 (Amounts in $)

Particulars	Qtr 1	Qtr 2	Qtr 3	Qtr 4	Year 2
1) Units sold	50,000	70,000	105,000	75,000	300,000
2) Sale price per unit	$7	$7	$7	$7	$7
3) Budgeted Sales (1*2)	350,000	490,000	735,000	525,000	2,100,000
4) Collection of sales for the current Qtr (3*75%)	262,500	367,500	551,250	393,750	1,575,000
5) Collection for the previous quarter sales (25% of previous quarter)	65,000	87,500	122,500	183,750	458,750
6) Total cash collections (4+5)	327,500	455,000	673,750	577,500	2,033,750

Total expected cash collections for the year is $2,033,750.

b) Calculation of total required production (in units)

Particulars	Qtr 1	Qtr 2	Qtr 3	Qtr 4	Year 2
Sales in units	50,000	70,000	105,000	75,000	300,000
Add: Desired Ending Inventory (30% of next quarter sales in units)	21,000	31,500	22,500	24,000	24,000
Less: Beginning Inventory in units	(12,000)	(21,000)	(31,500)	(22,500)	(12,000)
Required Production (in units)	59,000	80,500	96,000	76,500	312,000

The total required production for the year under this revised budget is 312,000 units

c) Calculation of cost of material to be purchased (Amounts in $)

Particulars	Qtr 1	Qtr 2	Qtr 3	Qtr 4	Year 2
1) Required Production in units	59,000	80,500	96,000	76,500	312,000
2) Raw materials required to produce one unit	5 pounds	5 pounds	5 pounds	5 pounds	5 pounds
3) Total raw materials production needs (1*2)	295,000	402,500	480,000	382,500	1,560,000
4) Ending Raw materials (10% of next qtr production needs)	40,250	48,000	38,250	**41,500	41,500
5) Beginning Raw materials	(23,000)	(40,250)	(48,000)	(38,250)	(23,000)
6) Raw materials required to be purchased (3+4-5)	312,250	410,250	470,250	385,750	1,578,500
7) Raw material costs per pound	$0.80	$0.80	$0.80	$0.80	$0.80
8) Cost of purchases of raw materials (6*7)	249,800	328,200	376,200	308,600	1,262,800

Therefore the total cost of raw materials to be purchased for the year under this revised budget is $1,262,800.

** Calculation of ending raw material for Qtr 4

Required production for Qtr 1 of year 3 = Sales+Ending inventory - Beg. inventory

= 80,000+(90,000*30%)-24,000 = 83,000 units

Raw material production needs for Qtr 1 of year 3 = 83,000 units*5 pounds = 415,000 pounds

Ending raw material for Qtr 4 of year 2 = 415,000*10% = 41,500 pounds

d) Calculation of cash disbursements (Amounts in $)

Particulars	Qtr 1	Qtr 2	Qtr 3	Qtr 4	Year 2
Payments for raw materials for the Qtr
Beginning Balance	81,500	-	-	-	81,500
Qtr 1 (60% in Qtr 1 and 40% in Qtr 2 of purchases $249,800)	149,880	99,920	-	-	249,800
Qtr 2 (60% in Qtr 2 and 40% in Qtr 3 of $328,200)	-	196,920	131,280	-	328,200
Qtr 3 (60% in Qtr 3 and 40% in Qtr 4 of $376,200)	-	-	225,720	150,480	376,200
Qtr 4 (60% in Qtr 4 and 40% in Qtr 1 of year 3 of purchases $308,600)	-	-	-	185,160	185,160
Total Cash disbursements	231,380	296,840	357,000	335,640	1,220,860

Therefore the total expected cash disbursements for raw materials for the year is $1,220,860.