Manny Fold owns a factory that specializes in making titaniumvalves for high performance engines on a just in time basis. Thus,Manny produces what he sells in a particular month. There are noinventories of finished goods or work in process. However, Mannydoes require that an inventory of direct raw materials equal to 20%of next monthâs production requirement be available at the end ofeach month. To build his business and gain new customers Manny hasextended generous credit terms to his customers. While Manny isconfident about the fundamentals of his business, he is concernedabout the possible income and cash flow implications. The variablecosts of producing a valve are budgeted at $7.20 per valve fordirect materials (3/4 pound of titanium alloy costing $9.60 perpound), $2.80 per valve for direct labor, and $5.50 per valve forvariable manufacturing overhead. Fixed manufacturing overhead isbudgeted at $74,700 per month during the 2nd quarter. The detailedcomponents of variable and fixed overhead are as listed below. Forvariable overhead, electric power is budgeted at $2.30 per unit,indirect labor is budgeted at $2.50 per unit, and supplies arebudgeted at $.70 per unit. For fixed overhead depreciation isbudgeted at $10,000 per month, Supervision and other factorysalaries are budgeted at $40,000 per month, property tax andinsurance combined are budgeted at $8,000 per month (which havebeen paid in advance through June 15 â see below), maintenance isbudgeted at $7,000 per month, licensing fees and permits to useproprietary technology are budgeted at $3,400 per month, and othermiscellaneous fixed overhead expenses are budgeted at $6,300 permonth. Mannyâs customers drive a hard bargain because they caneasily switch suppliers. They all do pay eventually, but many ofthem take their time about doing so and Manny is reluctant to gettough with them for fear they will take their business elsewhere.He tells you that all his sales are on credit (no cash sales). Hetypically collects only 10% of sales in the month of the sale, 30%of sales in the month after the sale and 60% of sales two monthslater (for example 10% of June sales would be collected in June,30% in July and 60% in August). On the other hand, he must pay for70% of his materials purchases in the same month of the purchaseand 30% in the month after. Cash costs of labor and overhead otherthan depreciation, property taxes and insurance are paid in thesame month they are incurred. Property taxes and insurance are paidin advance through June 15. The amount due for the next 6 months(starting June 16) must be paid in early June. All of the sellingand administrative expenses are fixed. Monthly fixed selling andadministrative costs, other than interest, amount to $43,600, ofwhich $6,000 is depreciation. These operating costs, exceptingdepreciation, are paid in cash in the month incurred. Manny haslarge tax loss carry forwards from a previous unsuccessful businessventure. Therefore, he does not expect to pay any income taxes thisyear. (In other words you may ignore income taxes). Manny plans tobuy new equipment costing $80,000 during the month of June. Thisequipment will be ready for use starting in July. The budgetedselling price of valves for April, May, and June is $23 per valve.Because of market competition there is not much flexibility toadjust the price and the price is expected to be stable during the2nd quarter. Manny budgeted sales in units for April at 17,000units. For May he expects to sell only 18,500 units. He hasprojected sales of 20,000 units for June and 18,000 units for July.Manny requires a minimum cash balance of $10,000 at the end of eachmonth. If the budgeted month end cash balance will fall below thislevel Manny plans to borrow enough cash at the beginning of thatsame month to keep his ending balance up to the minimum level.Mannyâs bank charges him interest at the rate of ½ % per month onthe balance outstanding during that month. Mannyâs bank charges himinterest at the rate of ½ % per month on the balance outstandingduring that month. Manny pays the interest at the beginning of thefollowing month and plans to repay as much as he can at thebeginning of that month without letting his budgeted cash balancego below $10,000 at month end. (On the budgeted income statementround interest expense to the nearest dollar) The companyâsmanagerial accountant has resigned unexpectedly before the 2ndquarter budget could be completed. You have been contracted tocomplete the master budget for June and for the 2nd quarter(including some missing numbers from May). Balances as of March 31for all relevant accounts have already been calculated by thisaccountant together with some of the amounts for April and May. Youmay assume that these balances and amounts shown in the tablesbelow are correct. REQUIREMENTS: (To Equal 24 project points) 1)Construct Mannyâs budgeted income statement for June and the totalfor the 2nd quarter. April and May have already been provided.Complete the template provided below. Show any necessarycalculations. (7 points) 2) Using the same forecast as inrequirement 1 construct Mannyâs budget for raw materials purchasesin June and the total for the 2nd quarter (You will also have tocomplete the budget for May) Complete the template provided whichalready has information for April and May. (2 points) 3) Using thesame forecast as you used in requirement 1 construct Mannyâs cashbudgets for June and the total for the 2nd quarter (You will alsohave to provide the missing number for May payments for purchases).Complete the templates provided below which already haveinformation for April and May. Show any necessary calculations. (3points) 4) Using the same forecast as you used in requirement 1construct Mannyâs budgeted balance sheet at the end of June.Complete the template provided which already has the March 31balances. (3 points) 5) During March Manny actually produced andsold 16,500 valves. Actual sales revenues were $381,950. Actualcosts and the original March budget based on 16,000 valves were asdetailed in the table below. Complete the table by constructing aflexible budget based on 16,500 valves and determining thevariances for the performance report. Use the template providedbelow for your answer. (7 points) 6) Write a brief reportexplaining some possible reasons why Mannyâs profits were differentfrom the amount projected in the master budget for March (2points). REQUIREMENT 1 Budgeted Income Statement April May June 2ndQuarter SALES REVENUES $391,000 $425,500 DIRECT MATERIALS USED($122,400) ($133,200) DIRECT LABOR ($47,600) ($51,800) VARIABLEOVERHEAD ($93,500) ($101,750) CONTRIBUTION MARGIN $127,500 FIXEDOVERHEAD ($74,700) ($74,700) FIXED OPERATING EXPENSES ($43,600)($43,600) OPERATING INCOME $ 9,200 INTEREST EXPENSE $0 NET INCOME$9,200 REQUIREMENT #2 BUDGETED PURCHASES OF TITANIUM ALLOY (directmaterial) April May June 2nd Quarter Valves to be produced 17,00018,500 20,000 X Pounds per unit 0.75 0.75 Titanium to be used12,750 13,875 Desired ending inventory (20%) 2,775 Pounds ofTitanium Needed 15,450 Less:Beginning Inventory 2,550 2,775 Poundsto be purchased 12,975 Cost per pound $9.60 Cost of Purchases$124,560 REQUIREMENT #3 COMPUTATION OF CASH COLLECTIONS (Use thisto calculate March & Feb sales) April May June 2nd QuarterSales Made 2 Months Ago $213,900 $220,800 Sales Made 1 Month Ago$110,400 $117,300 Sales Made this Month $39,100 $42,550 Total CashCollections $363,400 $380,650 COMPUTATION OF CASH PAYMENTS AprilMay June 2nd Quarter Payments for purchases of materials $122,184(used to calculate March purchases) Payments for direct Labor$47,600 $51,800 Payments for Variable Overhead $93,500 $101,750Payments for Fixed Overhead $56,700 $56,700 Payments for PropertyTaxes and Insurance $0 $0 Payments for other operating expenses$37,600 $37,600 Capital Expenditures $0 $0 Total Cash Payments$357,584 April May June 2nd Quarter Beginning Balance of Cash$10,324 $16,140 Cash Collections $363,400 $380,650 Total cashavailable $373,724 $396,790 Less: Cash Payments $357,584 EndingCash Balance Before Financing: $16,140 Borrowings $0 Repayments $0Interest Payments $0 End Cash Balance $16,140 REQUIREMENT #4:BUDGETED BALANCE SHEET FOR JUNE 30 March 31 June 30 ASSETS: CurrentAssets Cash $10,324 Accounts Receivable $545,100 Inventory (rawmaterials) $24,480 Prepaid Insurance and Property Taxes $20,000Total Current Assets $599,904 Equipment and Furniture $880,000Accumulated Depreciation ($540,000) Equipment & Furniture (net)$340,000 Total Assets $939,904 LIABILITIES AND EQUITY Liabilities(all current) Accounts Payable $34,992 Interest Payable 0 BankLoans Payable 0 Total Liabilities $34,992 Ownerâs Equity (Netincome increases this) $904,912 Total Liabilities and Equity$939,904 Actual Costs and Template for Requirement #5 Use this pageto answer this requirement. Performance Report for March Cost ItemActual results Flexible Budget Variance Flexible Budget for 16,500units Sales Volume Variance Static Master Budget for 16,000 unitsSales Revenues $381,950 $368,000 Direct Materials used $118,720$115,200 Direct Labor $45,600 $44,800 Electric Power $38,454$36,800 Indirect Labor $49,360 $40,000 Supplies $16,686 $11,200Supervision and other salaries $37,858 $40,000 Maintenance $8,925$7,000 Insurance and property tax $8,000 $8,000 Permits and licensefees $3,400 $3,400 Factory depreciation $10,000 $10,000 OtherOverhead expenses $8,650 $6,300 Total Production Expenses ?$322,700 Total Selling & Administrative Expenses $39,867$43,600 Total Expenses ? $366,300 Operating Income ? $1,700REQUIREMENT 6 (SPACE FOR REPORT)
