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	120,000	75,000	80,000	100,000
Selling price per unit	$7	per unit

   

   

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?

      

e.

After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 90,000 units in any one quarter. Is this a potential problem?

	Yes
	No

A

B

C

D

E

F

F

1Chapter 8: Applying Excel      2       3DataYear 2 QuarterYear 3 Quarter4 1234125Budgeted unit sales50,000 70,000 120,000 75,000 80,000 100,000 6       7 • Selling price per unit$7per unit    8 • Accounts receivable, beginning balance$65,000     9 • Sales collected in the quarter sales are made75%     10 • Sales collected in the quarter after sales are made25%     11 • Desired ending finished goods inventory is30%of the budgeted unit sales of the next quarter  12 • Finished goods inventory, beginning12,000units    13 • Raw materials required to produce one unit5pounds    14 • Desired ending inventory of raw materials is10%of the next quarter's production needs  15 • Raw materials inventory, beginning23,000pounds    16 • Raw material costs$0.80per pound    17 • Raw materials purchases are paid60%in the quarter the purchases are made  18     and40%in the quarter following purchase  19 • Accounts payable for raw materials, beginning balance$81,500     20   

Answer 1

Question 1

Since 75% of AR is collected in the quarter of the sale and the remaining in the subsequent quarter, the opening AR of $65,500 is assumed to be 25% of the sales from Year 1-Quarter 4 fully collected in Year 2 Quarter 1

Sales of Quarter 1, Quarter 2 and Quarter 3 will be fully collected as well by Quarter 4 Year 2.

(50,000 + 70,000 + 120,000) X $7 = $1,680,000

75% of Quarter 4 sales will be collected in Quarter 4 itself with remaining being uncollected as of the end of Year 2.

75% X 75,000 X $7 = $393,750

The Total Collections is Year 2 is 65,500 + 1,680,000 + 393,750 = $2,139,250

Question 2

The Total Sales for the Year is 50000 + 70000 + 120000 + 75000 = 315,000

The Opening Inventory of Finished Goods is 12,000

The Desired Closing Inventory is 30% of Q1 Year 3 = 30% X 80000 = 24,000

The Production Required for the Year is therefore = Closing + Sales - Opening = 24,000 + 315,000 - 12,000 = 327,000 Units

Question 3

Raw Materials for the Production in 2017 is 327,000 X 5 Pounds = 1,635,000 Units

Opening Raw Materials = 23,000

Expected Closing Raw Materials = 10% X 86,000 X 5 = 43,000

Required of Cost of Raw Materisl to be Purchased = (43,000 + 1,635,000 - 23,000) X $0.80 = $1,324,000

Note: Production Requirement in Q1 Year 3

Opening Inventory from Q4 Year 2 = 24,000

Units Sales = 80,000

Desired Closing Inventory = 30% X 100,000 = 30,000

Units to be Produced in Q1 Year 3 = 30,000 + 80,000 - 24,000 = 86,000

Question 4

The Opening Accounts Payable of $81,500 is paid in Year 2

The Purchases from Q1 to Q3 is also expected to be paid.

Of the Total Purchases during the Year of $1,324,000, Q1 to Q3 purchase is 1,324,000 - 304,400 = 1,019,600

Of the Q4 Purchases of $304,400, 60% is paid in Q4 amounting to $152,500

Hence the Total Disbursements in the Year is $81,500 + $1,019,600 + $152,500 = $1,253,300

Note: Q4 Raw Material Stock Details

Production Requirement = 75,000 X 5 = 375,000

Opening Stock = 10% X 375,000 = 37,500

Closing Stock = 43,000

Total Purchase Requirement in Q4 = (43,000 + 375,000 - 37,500) X 0.8 = 380,500 X 0.8 = 304,400