Question

PROBLEM 1 (60 Points)

Newtown Supply Company is preparing its master budget for 2017.Relevant data pertaining to its operating budgets are asfollows:

Sales Budget: Sales for the year are expectedto total 800,000 units. 20% of sales are expected to occur in the1^st quarter, 25% in the 2^nd quarter, 25% inthe 3^rd quarter, and 30% in the 4^th quarter.The unit selling price is expected to be $35 for the first 3quarters, and increasing to $38 beginning in the 4^thquarter.

Production Budget: Management desires tomaintain the ending finished goods inventories at 25% of the nextquarter’s budgeted sales volume.

(Sales in the 1^st quarter of 2018 areexpected to be the same as the 4^th quarter of2017.)

Direct Materials Budget: Each unit requires 3pounds of raw materials at a cost of $3 per pound. Managementdesires to maintain raw materials inventories at 10% of the nextquarter’s production requirements. (Production in the1^st quarter of 2018 is expected to be the same as the4^th quarter of 2017.)

Direct Labor Budget: Durham budgets 0.5 hoursfor direct labor per unit. The direct labor rate is expected to $20per hour for the 1^st, 2^nd, and 3^rdquarters, and increasing to $22 per hour in the 4^thquarter.

Budgeted Income Statement: The budgeted unitcost including budgeted direct materials, budgeted direct labor,and budgeted manufacturing overhead for 2017 is $22. The totalbudgeted selling and administrative expenses for 2017 are$2,200,000. The company’s effective tax rate is 30%.

Instructions

Prepare the following budgets by quarters and in total for2017:

(a)Sales

(b)Production

(c) Directmaterials

(d) Direct labor

(e) Income statement (Totals only –detail by quarter is not required.)

PROBLEM 2 (40 Points)

HFC Corp. has budgeted sales revenues as follows for the firstquarter of 2017:

January February March

Cashsales $ 95,000 $260,000 $200,000

Creditsales 130,000 140,000 90,000

Total sales $225,000 $400,000 $290,000

Past experience indicates that 60% of the creditsales will be collected in the month of sale and theremaining 40% will be collected in the following month. Purchasesof direct materials are all on credit and 50% arepaid in the month of purchase and 50% in the month followingpurchase. Budgeted materials purchases are as follows:

January $300,000

February $250,000

March $105,000

Other cash receipts:

(a) Proceeds from the sale of marketable securities in Marchwill net $60,000

Other cash disbursements are budgeted asfollows:

(a) Direct labor $45,000 in February and $35,000 in March.

(b) Manufacturing overhead $20,000 in February and $16,000 inMarch.

(c) Selling and administrative expenses are $28,000, whichincludes $1,000

depreciation expense permonth.

(d) Dividends of $70,000 will be paid in February.

(e) Equipment purchase of $75,000 in March.

The company wishes to maintain a minimum cash balance of $50,000at the end of each month. If necessary, the company borrows moneyfrom the bank at 6% interest (.5% monthly rate) to maintain theminimum cash balance. Borrowed money is repaid in months when thereis an excess cash balance (that is, when the cash on hand exceedsthe $50,000 minimum balance).The beginning cash balance on February1 is expected to be $60,000.

Instructions

(a) Prepare schedules for (1) expectedcollections from customers and

(2) expected payments for directmaterial purchases for February and

March.

(b) Prepare a cash budget for Februaryand March in columnar form.