Question A
Cash BudgetProblem
The Teletron Corporationmanufactures different types of printers for personal computers.The company is planning its cash needs for the first quarter of2006. In the past, Teletron has had to borrow money during thefirst quarter since sales peak during this period of time. It wouldlike to be aware of any potential cash shortages before theyoccur.
The Controller asks you,the Senior Budgeting Accountant, to prepare a Cashbudget for January, February, and March 2006 for the entirecompany. Today is December 1, 2005 and you have just met with otheremployees from the Purchasing, Production, Marketing, and Financedepartments. From this meeting you compiled the following table ofinformation (all based on estimates).
2005
2005
2006
2006
2006
Nov
Dec
Jan
Feb
Mar
Raw MaterialsPurchases
$ 20,000
$ 25,000
$ 25,000
$ 20,000
$ 25,000
Direct Labor Hours
1,600 hrs
1,760 hrs
1,760 hrs
2,240 hrs
1,760 hrs
Factory OverheadCosts
$ 4,000
$ 4,000
$ 4,000
$ 4,000
$ 4,000
Selling & AdministrativeExpenses
$ 10,000
$ 12,000
$ 12,000
$ 10,000
$ 12,000
Sales to customers
$ 100,000
$ 110,000
$ 120,000
$ 110,000
$ 100,000
Monthly sales to clientsare expected to be collected as follows: 60% in the first monthfollowing the sale; 30% in the second month following the sale; and10% in the third month following the sale. Note that October 2005sales to customers totaled $ 90,000.
Raw Material Purchasesare expected to be paid as follows: 50% in the month of thepurchase; 50% in the following month.
The production workersmake $ 25 per hour. There is no overtime and all wages are paid inthe month they are incurred.
Factory Overhead Costs arepaid in the month following the month they are incurred.
Selling &Administrative Expenses are paid in the month in the month they areincurred.
Teletron plans onborrowing $ 100,000 from its bank and will receive the money onJanuary 1, 2006. The loan is due to be paid back in 2008 in a lumpsum payment. The yearly interest rate will be 12% and interest willbe paid each month (assume the same interest expense each monthregardless of the number of days in each month).
Teletron plans on makingtwo $ 75,000 federal income tax payments during 2006 %u2013 one inJanuary 2006 and the other one in June 2006.
Teletron plans on paying$ 200,000 cash for the purchase of new production machinery inFebruary 2006.
Teletron plans on issuing(selling) 30,000 new shares of common stock in March 2006. Thesales price is expected to be $ 25 per share.
Teletron expects its cashbalance on December 31, 2005 to be $ 45,000.
(continued onback)
Requirements:
1. Prepare a cash budget for Teletron for each month of the firstquarter 2006 (i.e. January, February, and March 2006).
2. Comment on whether the ending cash balances each month areadequate for Teletron%u2019s cash needs and what Teletron might doin a month where the estimated cash balance isnegative.
QuestionB
Cost-Volume-ProfitAnalysis Problem
The Salazar Corporation manufactures only oneproduct %u2013 a medium-size, high-quality paper shredder calledthe MS-100. In an effort to better understand cost behavior,Salazar%u2019s accounting department has identified its costs aseither variable or fixed.
Salazar%u2019s Management wants to performCost-Volume-Profit (CVP) analysis to evaluate three differentscenarios it is considering for the year 2012. Under the currentproduction process (Scenario 1), variable costs are $ 90 per unitand fixed costs are $ 420,000 per year. The sales price for theMS-100 is $150 per unit and the number of units to be sold in 2012is 20,000 units.
Scenarios
- Leave the current production process as it is- make no changes.
- Purchase machinery that will decreasevariable costs by $ 30 per unit will but increase yearly fixedcosts by $ 390,000
- Purchase machinery that will decreasevariable costs by $ 15 per unit but will increase yearly fixedcosts by $ 255,000.
Requirements:
a) Calculate thecontribution margin per unit and the contribution margin ratio foreach of the three scenarios. Show your calculations.
b) Calculate the breakevenpoint in units and dollars - only for ScenarioI, the current production process. Show yourcalculations.
c) Prepare a contributionmargin income statement for each of the threescenarios.
d) Which of the three scenariosprovides the highest net income for the Salazar Company?
Salazar%u2019s management subsequently makes adecision that the company must make
$ 918,000 of after-tax net income in 2012,otherwise certain investors might decide to sell their ownershipinterest.
e) Calculate the salesthat Salazar must make in order to produce an after-tax net incomeof $ 918,000 (both in total sales dollars and in total salesunits). This calculation should be based on thescenario in d) that provides that highest net income.Salazar%u2019s income tax rate is 20%. Show your calculations.
f) Prepare aforecasted contribution margin income statement that shows theresults for the sales level computed in part e) above.
Question A
Cash BudgetProblem
The Teletron Corporationmanufactures different types of printers for personal computers.The company is planning its cash needs for the first quarter of2006. In the past, Teletron has had to borrow money during thefirst quarter since sales peak during this period of time. It wouldlike to be aware of any potential cash shortages before theyoccur.
The Controller asks you,the Senior Budgeting Accountant, to prepare a Cashbudget for January, February, and March 2006 for the entirecompany. Today is December 1, 2005 and you have just met with otheremployees from the Purchasing, Production, Marketing, and Financedepartments. From this meeting you compiled the following table ofinformation (all based on estimates).
2005 | 2005 | 2006 | 2006 | 2006 | |
Nov | Dec | Jan | Feb | Mar | |
Raw MaterialsPurchases | $ 20,000 | $ 25,000 | $ 25,000 | $ 20,000 | $ 25,000 |
Direct Labor Hours | 1,600 hrs | 1,760 hrs | 1,760 hrs | 2,240 hrs | 1,760 hrs |
Factory OverheadCosts | $ 4,000 | $ 4,000 | $ 4,000 | $ 4,000 | $ 4,000 |
Selling & AdministrativeExpenses | $ 10,000 | $ 12,000 | $ 12,000 | $ 10,000 | $ 12,000 |
Sales to customers | $ 100,000 | $ 110,000 | $ 120,000 | $ 110,000 | $ 100,000 |
Monthly sales to clientsare expected to be collected as follows: 60% in the first monthfollowing the sale; 30% in the second month following the sale; and10% in the third month following the sale. Note that October 2005sales to customers totaled $ 90,000.
Raw Material Purchasesare expected to be paid as follows: 50% in the month of thepurchase; 50% in the following month.
The production workersmake $ 25 per hour. There is no overtime and all wages are paid inthe month they are incurred.
Factory Overhead Costs arepaid in the month following the month they are incurred.
Selling &Administrative Expenses are paid in the month in the month they areincurred.
Teletron plans onborrowing $ 100,000 from its bank and will receive the money onJanuary 1, 2006. The loan is due to be paid back in 2008 in a lumpsum payment. The yearly interest rate will be 12% and interest willbe paid each month (assume the same interest expense each monthregardless of the number of days in each month).
Teletron plans on makingtwo $ 75,000 federal income tax payments during 2006 %u2013 one inJanuary 2006 and the other one in June 2006.
Teletron plans on paying$ 200,000 cash for the purchase of new production machinery inFebruary 2006.
Teletron plans on issuing(selling) 30,000 new shares of common stock in March 2006. Thesales price is expected to be $ 25 per share.
Teletron expects its cashbalance on December 31, 2005 to be $ 45,000.
(continued onback)
Requirements:
1. Prepare a cash budget for Teletron for each month of the firstquarter 2006 (i.e. January, February, and March 2006).
2. Comment on whether the ending cash balances each month areadequate for Teletron%u2019s cash needs and what Teletron might doin a month where the estimated cash balance isnegative.
QuestionB
Cost-Volume-ProfitAnalysis Problem
The Salazar Corporation manufactures only oneproduct %u2013 a medium-size, high-quality paper shredder calledthe MS-100. In an effort to better understand cost behavior,Salazar%u2019s accounting department has identified its costs aseither variable or fixed.
Salazar%u2019s Management wants to performCost-Volume-Profit (CVP) analysis to evaluate three differentscenarios it is considering for the year 2012. Under the currentproduction process (Scenario 1), variable costs are $ 90 per unitand fixed costs are $ 420,000 per year. The sales price for theMS-100 is $150 per unit and the number of units to be sold in 2012is 20,000 units.
Scenarios
- Leave the current production process as it is- make no changes.
- Purchase machinery that will decreasevariable costs by $ 30 per unit will but increase yearly fixedcosts by $ 390,000
- Purchase machinery that will decreasevariable costs by $ 15 per unit but will increase yearly fixedcosts by $ 255,000.
Requirements:
a) Calculate thecontribution margin per unit and the contribution margin ratio foreach of the three scenarios. Show your calculations.
b) Calculate the breakevenpoint in units and dollars - only for ScenarioI, the current production process. Show yourcalculations.
c) Prepare a contributionmargin income statement for each of the threescenarios.
d) Which of the three scenariosprovides the highest net income for the Salazar Company?
Salazar%u2019s management subsequently makes adecision that the company must make
$ 918,000 of after-tax net income in 2012,otherwise certain investors might decide to sell their ownershipinterest.
e) Calculate the salesthat Salazar must make in order to produce an after-tax net incomeof $ 918,000 (both in total sales dollars and in total salesunits). This calculation should be based on thescenario in d) that provides that highest net income.Salazar%u2019s income tax rate is 20%. Show your calculations.
f) Prepare aforecasted contribution margin income statement that shows theresults for the sales level computed in part e) above.
