5-4

CM ratio = Contribution margin 1)

Sales Variable Expenses Contribution Margin CM Ratio 2) Change in total sales CM ratio Estimated Change

Sales
300,000 300-240 = 60 240,000 60,000 0.20

1500 20% 300

5-7
1) Break even point in sales 2750 BE = 8x - 6x - 5,500 (where x is the units) BE = 2x - 5,500(2 dollars is the profit made on each basket) 5,500 = 2x x = 5,500/2 x = 2,750 baskets are needed to break-even 2) CM Ratio Break even point in dollar sales 0.25 (8-6) / 8 = .25 22,000 (5500 / .25)

3) Unit sales

5500 ( 5500 /2) 2750

4) Dollar sales to break even 0 + 5,500 (5500 /.25) 22,000

8-1
May $430,000 $430,000 June $540,000 $540,000 July $600,000 $600,000

May

June

July

20% collected in month of sale 70% collected in month after sale 10% collected in 2nd month after Total Accounts Receivable -- September 30: From August Sales: From September Sales: Total A/R Check:

$86,000

$108,000 301,000 $409,000 %

Uncollected

$86,000

$120,000 378,000 43,000 $541,000

$900,000 $500,000

10% 80%

A/R $90,000 400,000 $490,000

Total Sales: Less Total Collections: Accounts Receivable -- September 30:

$2,970,000 2,480,000 $490,000

8-10
1st Quarter 2nd Quarter Budgeted unit sales Selling price per unit Total sales 3rd Quarter 4th Quarter Year

16,000 $22.00 $352,000

15,000 $22.00 $330,000

14,000 $22.00 $308,000

15,000 $22.00 $330,000

60,000 $22.00 $1,320,000

66,000 334,400 313,500 292,600 247,500 1,254,000

Accounts receivable, beginning balance 66,000 1st Quarter sales 264,000 2nd Quarter sales 3rd Quarter sales 4th Quarter sales Total cash collections 330,000

70,000 247,500

66,000 231,000 297,000

317,500

61,600 247,500 309,100

Budgeted unit sales Add desired ending inventory Total units needed Less beginning inventory Required production

1st Quarter 2nd Quarter 16,000 15,000 3,000 2,800 19,000 17,800 3,200 3,000 15,800 14,800

3rd Quarter 14,000 3,000 17,000 2,800 14,200

4th Quarter 15,000 3,400 18,400 3,000 15,400

Year 60,000 3,400 63,400 3,200 60,200

August September $900,000 $500,000 $900,000 $500,000

Total $2,000,000 $2,970,000

August

September

Total

$180,000 420,000 54,000 $654,000

$100,000 630,000 60,000 $790,000

$400,000 1,428,000 157,000 $1,985,000

Exercise 8-2:

Production Budget

Given: Crystal telecom has budgeted the sales of its innovative mobile phone over the next four months as follows: Unit Sales July 30,000 August 45,000 September 60,000 October 50,000 The company is now in the process of preparing a production budget for the third quarter. Past experience has shown that end-of-month inventories of finished goods must equal 10% of the next month's sales. The inventory at the end of June was 3,000. Required: Prepare a production budget for the third quarter showing the number of units to be produced each month and for the quarter in total. July 30,000 4,500 34,500 3,000 31,500 August 45,000 6,000 51,000 4,500 46,500 September 60,000 5,000 65,000 6,000 59,000 Quarter 135,000 5,000 140,000 3,000 137,000 137,000 October 50,000

Budgeted Sales Desired EI** Total Units Desired Less BI Production

** EI is anticipated to be 10% of the next month's sales

Exercise 8-3:

Direct Materials Budget

Given: Micro Products, Inc. has developed a very powerful electronic calculator. Each calculator requires 3 small "chips" that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below: 1st Quarter Y2 2nd Quarter Y2 3rd Quarter Y2 4th Quarter Y2 60,000 90,000 150,000 100,000

Budgeted Production (Calculators)

The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stockout. For this reason, the inventory of chips at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 36,000 chips will be on hand to start the first quarter of Year 2. Required: Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At the bottom of your budget, show the dollar amount of purchases for each quarter and for the year in total. 1st Quarter Y2 2nd Quarter Y2 3rd Quarter Y2 4th Quarter Y2 60,000 90,000 150,000 100,000 3 3 3 3 180,000 270,000 450,000 300,000 54,000 90,000 60,000 48,000 234,000 360,000 510,000 348,000 36,000 54,000 90,000 60,000 198,000 306,000 420,000 288,000 $2 $2 $2 $2 $396,000 $612,000 $840,000 $576,000

Budgeted Production (Calculators) # of chips needed per calculator Total chips needed for production Desired EI ** Total direct materials needed Less: BI of chips Required purchases of chips (units) Cost per chip Required purchases of chips (dollars)

** EI is anticipated to be 20% of the next quarter's production needs.

own below: 1st Quarter Y3 80,000

arge inventories as a e equal to 20% of the f Year 2.

r budget,

Year 2 400,000 3 1,200,000 48,000 1,248,000 36,000 1,212,000 $2 $2,424,000

Exercise 8-4:

Direct Labor Budget

Given: The Production Department of the Riverside Plant of Junnen Corporation has submitted the following forecast of units to be produced at the plant for each quarter of the upcoming fiscal year. The plant produces high-end outdoor barbecue grills. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 5,000 4,400 4,500 4,900

Units to be produced

Each unit requires 0.40 direct labor hours and direct labor workers are paid $11 per hour. Required: 1. Construct the company's direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units produced. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 5,000 4,400 4,500 4,900 0.4 0.4 0.4 0.4 2,000 1,760 1,800 1,960 $11 $11 $11 $11 $22,000 $19,360 $19,800 $21,560 Year 18,800 0.4 7,520 $11 $82,720

Units to be produced Direct labor hours required per grill Total DLHs required for production DL Cost per hour Total Budgeted DL Costs

2. Construct the company's direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is not adjusted each quarter. Instead assume that the company's direct labor workforce consists of permanent employees who are guaranteed to be paid for at least 1,800 hours of work each quarter. If the number of required direct labor hours is less than this number, the workers are paid for 1,800 hours anyway. Any hours worked in excess of 1,800 hours in a quarter are paid at the rate of 1.5 times the normal hourly rate for DL. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 5,000 4,400 4,500 4,900 0.40 0.40 0.40 0.40 2,000 1,760 1,800 1,960 1,800 1,800 1,800 1,800 $11 $11 $11 $11 $19,800 $19,800 $19,800 $19,800 200 0 0 160 $16.50 $16.50 $16.50 $16.50 $3,300 $0 $0 $2,640 $23,100 $19,800 $19,800 $22,440 Year 18,800 0.40 7,520 7,200 $11 $79,200 360 $16.50 $5,940 $85,140

Units to be produced Direct labor hours required per grill Total DLHs required for production Minimum guaranteed hours (@ $11) Wage rate for guaranteed hours Wages for guaranteed time Overtime hours Wages rate for overtime hours (1.5X) Wages for overtime Total Budgeted DL Costs

Exercise 8-5:

Manufacturing Overhead Budget

Given: The direct labor budget of Krispin Corporation for the upcoming fiscal year contains the following details concerning budgeted direct labor hours. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 5,000 4,800 5,200 5,400

Budgeted DL Hours

The company's VMOH rate is $1.75 per DLH and the company's FMOH is $35,000 per quarter. The only noncash item included in the FMOH is depreciation, which is $15,000 per quarter. Required: 1. Construct the company's MOH budget for the upcoming fiscal year. 1st Quarter 5,000 $1.75 $8,750 35,000 $43,750 2nd Quarter 4,800 $1.75 $8,400 35,000 $43,400 3rd Quarter 5,200 $1.75 $9,100 35,000 $44,100 4th Quarter 5,400 $1.75 $9,450 35,000 $44,450 $8.6127

Budgeted DL Hours VMOH rate per DLH Budgeted VMOH Expense Budgeted FMOH Expense Budgeted TMOH Expense

2. Compute the company's TMOH rate for the upcoming fiscal year.

Year 20,400 $1.75 $35,700 140,000 $175,700

Exercise 8-6:

Selling and Administrative Expense Budget

Given: The budgeted unit sales of Haerve Company for the upcoming fiscal year are provided below: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 12,000 14,000 11,000 10,000

Budgeted unit sales

The company's variable selling and administrative expense per unit is $2.75. Fixed selling and Administrative expenses include advertising expenses of $12,000 per quarter, executive salaries of $40,000 per quarter, and depreciation of $16,000 per quarter. In addition, the company will make insurance payments of $6,000 in the 2nd Quarter and $6,000 in the 4th Quarter. Finally, property taxes of $6,000 will be paid in the 3rd Quarter. Required: Prepare the company's selling and administrative expense budget for the upcoming fiscal year. 1st Quarter 12,000 $2.75 $33,000 $12,000 40,000 16,000 2nd Quarter 14,000 $2.75 $38,500 $12,000 40,000 16,000 6,000 $74,000 $112,500 3rd Quarter 11,000 $2.75 $30,250 $12,000 40,000 16,000 6,000 $74,000 $104,250 4th Quarter 10,000 $2.75 $27,500 $12,000 40,000 16,000 6,000 $74,000 $101,500

Budgeted units Variable S & A rate per unit Budgeted Variable S & A Expense Budgeted Fixed S & A Expenses: Advertising Executive salaries Depreciation Insurance Expense1 Property Tax Expense1 Total Fixed S & A Expense Total Budgeted S&A Expense
1

$68,000 $101,000

Are these expense items or cash payments?

nd Administrative 0 per quarter, ments of $6,000

Year 47,000 $2.75 $129,250 $48,000 160,000 64,000 12,000 6,000 $290,000 $419,250

Problem 8-24: Given: The president of Univax, Inc., has just approached the company's bank seeking short-term financing for the coming year, Year 2. Univax is a distributor of commercial vacuum cleaners. The bank has stated that the loan request must be accompanied by a detailed cash budget that shows the quarters in which financing will be needed, as well as the amounts that will be needed and the quarters in which repayments can be made. To provide this information for the bank, the president has directed that the following data be gathered from which a cash budget can be prepared: a. Budgeted sales and merchandise purchases for Year 2, as well as actual sales and purchases for the last quarter of Year 1, are as follows: Merchandise Year 1: Sales Purchases Fourth quarter actual $300,000 $180,000 Year 2: First quarter, estimated $400,000 $260,000 Second quarter, estimated $500,000 $310,000 Third quarter, estimated $600,000 $370,000 Fourth quarter estimated $480,000 $240,000 b. The company typically collects 33% of a quarter's sales before the quarter ends and another 65% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the actual data for the Year 1 fourth quarter. c. Some 20% of a quarter's merchandise purchases are paid for within the quarter. The remainder is paid in the follow quarter. d. Selling & Administrative Expenses for Year 2 are budgeted at $90,000 per quarter plus 12% of sales. Of the fixed amount, $20,000 each quarter is depreciation. e. The company will pay $10,000 in cash dividends each quarter. f. Land purchases will be made as follows during the year: $80,000 in the second quarter and $48,500 in the third quarter. g. The Cash account contained $20,000 at the end of Year 1. The company must maintain a minimum cash balance of at least $18,000. h. The company has an agreement with a local bank that allows the company to borrow in increments of $10,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, replay the loan plus accumulated interest at the end of the year. i. At present, the company has no loans outstanding.

Required: 1. Prepare the following, by quarter and in total, for Year 2: a. A schedule of expected cash collections on sales.

Sales Collections in month of sales (33%) Collections in month following sales (65%)

$300,000
4th Q Year 1

$400,000
1st Q Year 2

$500,000
2nd Q Year 2

$600,000
3rd Q Year 2

$480,000
4th Q Year 2

$132,000 $195,000 $327,000

$165,000 $260,000 $425,000

$198,000 $325,000 $523,000

$158,400 $390,000 $548,400

b. A schedule of expected cash disbursements for merchandise purchases.

Purchases

$180,000
4th Q Year 1

$260,000
1st Q Year 2

$310,000
2nd Q Year 2

$370,000
3rd Q Year 2

$240,000
4th Q Year 2

Payments for purchases -- month of purchase (20%) Payments for purchases -- following quarter (80%)

$52,000 $144,000 $196,000

$62,000 $208,000 $270,000

$74,000 $248,000 $322,000

$48,000 $296,000 $344,000

2. Compute the expected cash disbursements for selling and administrative expenses, by quarter and in total, for Year 2. Sales $300,000 $400,000 $500,000 $600,000 $480,000
4th Q Year 1 Payments for var. operating expenses (12% of sales) Fixed operating expenses less non-cash depreciation Cash disbursements for operating expenses 1st Q Year 2 2nd Q Year 2 3rd Q Year 2 4th Q Year 2

$48,000 $70,000 $118,000

$60,000 $70,000 $130,000

$72,000 $70,000 $142,000

$57,600 $70,000 $127,600

3. Prepare a cash budget by quarter and in total for Year 2. Cash Budget:
1st Q Year 2 2nd Q Year 2 3rd Q Year 2 4th Q Year 2

Cash balance, beginning Add cash collections Total cash available Less disbursements: Merchandise purchases Selling & Administrative Land Dividends (Declared & Paid) Total disbursements
Net Cash Inflow before Financing

$20,000 327,000 $347,000 $196,000 $118,000 $10,000 $324,000 $23,000 $5,000 $0 0 0 $0 $23,000 $18,000 $5,000

$23,000 425,000 $448,000 $270,000 $130,000 $80,000 $10,000 $490,000 ($42,000) $0 $60,000 0 0 $60,000 $18,000 $18,000 $0

$18,000 523,000 $541,000 $322,000 $142,000 $48,500 $10,000 $522,500 $18,500 $500 $0 0 0 $0 $18,500 $18,000 $500

$18,500 548,400 $566,900 $344,000 $127,600 $10,000 $481,600 $85,300 $67,300 $0 ($60,000) (5,400) ($65,400) $19,900 $18,000 $1,900

Available for repayment Financing: Borrowings Repayments $10,000 Interest 1% Total Financing Cash balance, ending Desired minimum cash balance Excess Over Desired Minimum

Total $653,400 $1,170,000 $1,823,400

Total $236,000 $896,000 $1,132,000

uarter and in

Total $237,600 $280,000 $517,600

Y2

$20,000 1,823,400 $1,843,400 $1,132,000 $517,600 $128,500 $40,000 $1,818,100 $25,300 $7,300 $60,000 ($60,000) ($5,400) ($5,400) $19,900 $18,000 $1,900

Exercise 8-27:

Completing a Master Budget

Given: Nordic Company, a merchandising company, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparation of the master budget for the second quarter. a. As of March 31 (the end of the prior quarter), the company's balance sheet showed the following account balances: Cash Accounts Receivable Inventory Building and equipment Accounts Payable Capital Stock Retained Earnings Total b. $9,000 48,000 12,600 214,100 $18,300 190,000 75,400 $283,700

$283,700

Actual sales for March and budgeted sales for April-July are as follows: Actual Budgeted Budgeted Budgeted March April May June $60,000 $70,000 $85,000 $90,000 Budgeted July $50,000

$245,000

c.

Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following the sale. The A/R at March 31 are a result of March credit sales. The company's gross margin % is 40% of sales. (In other words, cost of goods sold is 60% of sales.) Monthly expenses are budgeted as follows: Salaries and wages Shipping Advertising Other expenses Depreciation, including depreciation on new assets acquired during the quarter, will be $7,500 6% $6,000 4% per month of sales per month of sales

d. e.

$6,000 for the quarter 30% of the following month's COGS

f. g.

Each month's EI should equal

Half of a month's inventory purchases are paid for in the month of purchase and half in the following month. Equipment purchases during the quarter will be as follows: April May $11,500 $3,000 $3,500 $8,000

h.

i. j.

Dividends declared and paid in June

Management wants to maintain a minimum cash balance of $8,000.

The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the data above, complete the following statements and schedules for the second quarter: 1. Schedule of expected cash collections: Actual March Total Sales $60,000 Collections from: Cash Sales (20%) Credit Sales (80%, 1-month delay) Total Cash Collections 2. a. Merchandise purchases budget: March $60,000 March $36,000 12,600 $48,600 10,800 $37,800 April $70,000 April $42,000 15,300 $57,300 12,600 $44,700 May $85,000 May $51,000 16,200 $67,200 15,300 $51,900 June $90,000 June $54,000 9,000 $63,000 16,200 $46,800 July $50,000 Quarter $147,000 9,000 $156,000 12,600 $143,400

April $70,000 April $14,000 48,000 $62,000

May $85,000 May $17,000 56,000 $73,000

June $90,000 June $18,000 68,000 $86,000

Total $305,000 Quarter $49,000 172,000 $221,000

Total Sales

Budgeted COGS (60% of Sales) Add desired EI (30% next COGS) Total Needs Less BI (30% of this month's COGS) Purchases

b. Schedule of expected cash disbursement for merchandise purchases: March $18,300 April $22,350 18,300 $40,650 May $25,950 22,350 $48,300 June $23,400 25,950 $49,350 Quarter $71,700 66,600 $138,300

50% paid in month of purchase 50% paid In month after purchase Total 3.

Schedule of expected cash disbursements for selling & administrative April $7,500 $4,200 $6,000 $2,800 $20,500 May $7,500 $5,100 $6,000 $3,400 $22,000 June $7,500 $5,400 $6,000 $3,600 $22,500 Quarter $22,500 $14,700 $18,000 $9,800 $65,000

Salaries and Wages Shipping (6% of sales) Advertising Other Expenses (4% of sales) Total Selling & Admin. 4. Cash Budget: Cash balance, beginning

April $9,000

May $8,350

June $8,050

Quarter $9,000

Add cash collections Total cash available Less disbursements: Inventory purchases Selling & Administrative Equipment purchases Dividends (Declared & Paid) Total disbursements
Net Cash Inflow before Financing

62,000 $71,000 $40,650 $20,500 $11,500 $72,650 ($1,650) $0 $10,000 0 0 $10,000 $8,350 $8,000 $350

73,000 $81,350 $48,300 $22,000 $3,000 $73,300 $8,050 $50 $0 0 0 $0 $8,050 $8,000 $50

86,000 $94,050 $49,350 $22,500 $3,500 $75,350 $18,700 $10,700 $0 (10,000) (300) ($10,300) $8,400 $8,000 $400

221,000 $230,000 $138,300 $65,000 $14,500 $3,500 $221,300 $8,700 $700 $10,000 ($10,000) ($300) ($300) $8,400 $8,000 $400

Available for repayment Financing: Borrowings Repayments Interest Total Financing Cash balance, ending

$1,000 1%

Desired minimum cash balance Excess Over Desired Minimum 5.

Prepare an absorption costing I/S statement for the quarter ending June 30 Nordic Company Absorption Costing Income Statement For the Quarter Ended June 30th Sales Cost of Goods Sold: Beginning Inventory Add purchases Goods available for sale Ending Inventory Gross Margin Selling & Administrative Expenses Net Operating Income Less Interest Expense Net Income $245,000 $12,600 143,400 $156,000 9,000

147,000 $98,000 71,000 $27,000 (300) $26,700

0.6 0.4

6.

Prepare a balance sheet as of June 30. Nordic Company Balance Sheet 6/30/20?? Assets: Current Assets: Cash Accounts Receivable Inventory Long-Term Assets:

$8,400 72,000 9,000

$89,400

Net Building and Equipment Total Assets Equity: Current Liabilities: Accounts Payable Stockholders' Equity Capital Stock Retained Earnings** Total Equity

222,600 $312,000

$23,400 $190,000 98,600

$288,600 $312,000

**Retained Earnings: Beginning Balance Plus: Net Income Less: Dividends Declared Ending Balance

$75,400 26,700 (3,500) $98,600

Total $355,000