Financial planning involves computation of series of budget.
Russell, Inc. is in the process of preparing the fourth budget for 2007, and the following data have been assembled:
The company sells a single product at a selling price of $50 per unit. The estimated sales volume for the six months is as follows:
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September
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October
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November
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December
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January
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February
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Units
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26,000
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24,000
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28,000
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40,000
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18,000
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10,000
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All sales are on account. The company's collection experience has been that 33% of a month's sales are collected in the month of sale, 65% in the month following the sale, and 2% are uncollectible. According to the budget, the net realizable value of accounts receivable (i.e. accounts receivable less allowance for uncollectible accounts) is expected to be $845,000 on September 30, 2007.
Management's policy is to maintain ending finished goods inventory each month at a level equal to 40% of the next month's budgeted sales. The finished goods inventory on September 30, 2007, is expected to be 9,600 units.
To make one unit of finished product, five pounds of material are required. Management's policy is to have enough materials on hand at the end of each month to equal 30% of the next month's estimated usage. The raw materials inventory is expected to be 38,400 pounds on September 30, 2007.
The cost per pound of material is $4, and 75% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $126,600 on September 30, 2007.
Instructions:
Proceed to the \"Analysis\" worksheet and complete the basic problem requirements. Complete the problem requirements by entering appropriate amounts or formulas in shaded worksheet cells:
a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2007.
b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2007.
c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2007.
d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2007.
e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2007.
After completing the \"Analysis\" worksheet, please proceed to the \"What the Numbers Mean\" worksheet and respond to the additional requirements presented.
1) What does it mean?
Assume that Seymour, Inc. decided that because of strong economic conditions in general, a 10% increase in the expected number of units to be sold each month was realistic. Explain the effect, in general, on each of the budgets presented of a 10% increase in the number of units sold.
2) What does it mean?
Assuming that the number of units sold would not change, explain the effect on the budgets presented of a 5% increase in the selling price of the product. How does this price change effect differ from the sales volume effect you described above?
3) What does it mean?
The purchasing manager is evaluating an alternative supplier that would provide a slightly lower grade of raw material at a savings from the current price of $4 per pound. The new price would be at $3.50 per pound but the product would now require six pounds of the lower grade of raw material to produce the same number of good finished units as currently achieved. Would you recommend the change to the new supplier? What if the new price was to be $3.25? How about a price of $3.281282? Explain your answers.