Question

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows: Endless Mountain Company Balance Sheet December 31, 2016 Assets Current assets: Cash $ 46,200 Accounts receivable (net) 260,000 Raw materials inventory (4,500 yards) 11,250 Finished goods inventory (1,500 units) 32,250 Total current assets $ 349,700 Plant and equipment: Buildings and equipment 900,000 Accumulated depreciation (292,000 ) Plant and equipment, net 608,000 Total assets $ 957,700 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 158,000 Stockholders’ equity: Common stock $ 419,800 Retained earnings 379,900 Total stockholders’ equity 799,700 Total liabilities and stockholders’ equity $ 957,700 The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget: The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units. All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter. Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales. Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards. Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter. Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred. The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred. The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred. The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings. Dividends of $15,000 will be declared and paid in each quarter. The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers. 2. Prepare a budgeted variable costing income statement for 2017. Stop your computations at net operating income.

Answer 1

			Balance Sheet 2016
	Cash	46200	Accounts payable	158000
	Accounts Receivable	260000
	Raw Materials inventory(4500 yards)	11250	Stockholders Equity
	Finished goods inventory(1500 units)	32250	Common Stock	419800
	Total Current assets	349700	Retained earnings	379900
				799700
	Plant and Equipment
	Buildings and Equipment	900000
	Accumulated depreciation	-292000
	Plant and Equipment, Net	608000
	Total assets	957700		957700
	Sales Budget
		Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
	Sales (Units)	12000	37000	15000	25000	89000		13000
	Sale Unit Price	32	32	32	32	32
	Sales	384000	1184000	480000	800000	2848000
	Production Budget
	Sales	89000
	Ending Inventory(15%*13000)	1950
	Total Units required	90950
	Less : Opening Inventory	-1500
	Units to be produced	89450
	Raw Material to be purchased
	Units to be produced	89450
		3.5
	Total yard required	313075
	Add: Closing Inventory	5000
	Less : Opening Inventory	4500
	Raw Material to be purchased	313575
	Unit price	3
	Direct Material costs	940725
	Direct Labor
	Units to be produced	89450	89000
	Labor hours	22362.5	22250
	Labor Rate	18
	Direct Labor costs	402525	400500
	Selling and Administrative Expense
	Sales	89000
	Unit Price	1.25
	Selling and Administrative Expense	111250
	Budgeted variable costing income statement for 2017
	Revenue	2848000
	Less : Cost of Goods Sold	1335000
	Gross Profit	1513000
	Less : Selling and administrative expenses	-111250
	Contribution Margin	1401750