Okay Co., a new startup business, is preparing their budget for the first quarter 2022 ending March 31.
Budgeted sales of the company’s only product for the next five months are:
The selling price is $57 per unit.
Prepare the following elements of the master budget for this problem: (150 points)
1. Sales budget (a. with a schedule of expected cash collections).
2. Production budget.
3. Direct materials budget (b. with a schedule of expected cash disbursements for materials).
4. Direct labor budget.
5. Manufacturing overhead budget.
6. Ending finished goods inventory budget.
7. Selling and administrative expense budget.
8. Cash budget.
9. Budgeted income statement.
10. Budgeted balance sheet. (beginning and ending balance sheet)
SCHEDULE OF EXPECTED CASH COLLECTIONS
All Sales are on account.
The company collects 65% of credit sales in the month of the sale and 35% of credit sales in the following month.
The accounts receivable balance on January 1 was $0.
The company desires to have inventory on hand at the end of each month equal to 25% of the following month’s budgeted unit sales.
On December 31, 0 units were on hand.
DIRECT MATERIALS BUDGET
• 7.0 pounds of material are required per unit of product.
Management desires to have materials on hand at the end of each month equal to 15% of the following month’s production needs.
The beginning materials inventory was 0 pounds.
The material costs $.56 per pound.
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR MATERIAL
60% of a month’s purchases are paid for in the month of purchase; 40% is paid for in the following month.
No discounts are given for early payment.
The accounts payable balance on December 31 was $0.
DIRECT LABOR BUDGET
Each unit produced requires .70 hours of direct labor.
Each hour of direct labor costs the company $15.00.
Management fully adjusts the workforce to the workload each month.
MANUFACTURING OVERHEAD BUDGET
Variable manufacturing overhead is $3.30 per direct labor-hour.
Fixed manufacturing overhead is $92,000 per month. This includes $16,000 in depreciation, which is not a cash outflow.
ENDING FINISHED GOODS INVENTORY BUDGET
Okay, a new startup business, uses absorption costing in its budgeted income statement and balance sheet.
Manufacturing overhead is applied to units of product on the basis of direct labor-hours.
The company has no work in process inventories.
SELLING AND ADMINISTRATIVE EXPENSE BUDGET
Variable selling and administrative expenses are $1.20 per unit sold.
Fixed selling and administrative expenses are $63,000 per month and include $9,000 in depreciation.
1. A line of credit is available at a local bank.
a. All borrowing occurs at the beginning of the month, and all repayments occur at the end of the month. Borrowing occurs in increments of $1,000.
b. Any interest incurred during the first quarter will be paid at the end of the quarter. The interest rate is 18% per year.
2. Okay, a new startup business, desires a cash balance of at least $30,000 at the end of each month. The cash balance at the beginning of January was $18,000.
3. Cash dividends of $35,000 are to be paid to stockholders in February.
4. Equipment purchases of $124,000 are scheduled for January and $112,000 for February. This equipment will be installed and tested during the first quarter and will not become operational until April, when depreciation charges will commence.
The following balances exist on January 1:
Common Stock $480,000
A. Complete the Master Budget (ALL parts plus schedules) in Excel.
B.Answer the following questions:
1. What are the budgeted sales for February?
2. What are the expected cash collections for February?
3. What is the accounts receivable balance at the end of March?
4. What is the estimated cost of raw materials purchases for February?
5. What is the estimated accounts payable balance at the end of March?
6. What is the estimated finished goods inventory balance at the end of March?
7 What is the estimated cost of goods sold and gross margin for March?
8. What is the estimated total selling and administrative expense for February?
9. What is the estimated net operating income for March?
10. What is the estimated retained earnings balance for March?
Part II (Chapter 25) (50 points)
C. Assume that Okay expects to produce and sell 95,000 units during the current year. One of Okay’s sales representatives has found a new customer that is willing to buy 9,000 additional units for a price of $44 per unit. If they accept the customer’s offer, it will decrease unit sales to regular customers by 5,000 units. Should they accept this special order? Show all work/calculations to justify your decision.
D. Assume that Okay expects to produce and sell 22,000 units during the current quarter. A supplier has offered to manufacture and deliver 22,000 units for a price of $28 per unit. Should Okay accept this offer? How much will profit’s increase or decrease? Show all work/calculations to justify your decision.
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