Problem 1. The Rocky Mountain Company produces snowboards. Each snowboard requires six pounds of carbon fiber. The company’s management predicts that 3,200 snowboards and 2,000 pounds of carbon fiber will be in inventory March 31 of the current year and that 9,600 snowboards will be sold during the next (second) quarter. Management wants to end the second quarter with only 800 snowboards and 1,200 pounds of carbon fiber on hand. Carbon fiber can be purchased for $6.00 per pound.
Required
1. Prepare the second quarter production budget for boomerangs.
2. Prepare the second quarter direct materials (carbon fiber) budget; include the dollar cost of purchases.
Problem 2. During the last week of August, the owner of Rapid River Company approaches the bank for a $180,000 loan to be made on September 1 and repaid on November 30 with annual interest of 9%, for an interest cost of $4,050. The owner plans to increase the store’s inventory by $135,000 during September and needs the loan to pay for inventory acquisitions. The bank’s loan officer needs more information about Rapid River’s ability to repay the loan and asks the owner to forecast the store’s November 30 cash position. On September 1, Rapid River is expected to have a $48,000 cash balance, $192,000 of accounts receivable, and $165,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash disbursements for the next three months follow:
September October November
Sales $300,000 $350,000 $420,000
Merchandise purchases 280,000 220,000 250,000
Cash Disbursements
Payroll 25,000 25,000 25,000
Rent 6,000 6,000 6,000
Other cash expenses 15,000 18,000 12,000
Repayment of bank loan 180,000
Interest on bank loan 4,050
The budgeted September merchandise purchases include the inventory increase. All sales are on account. Company experience shows that 30% of credit sales is collected in the month of the sale, 40% in the month following the sale, 15% in the second month, 10% in the third, and the remaining 5% is uncollectible. Applying these percents to the September 1 accounts receivable balance, for example, shows that $105,000 of the $192,000 will be collected in September, $52,000 in October, and $28,000 in November. All merchandise is purchased on credit; seventy percent of the balance is paid in the month following a purchase, and the remaining 30% is paid in the second month. For example, of the $165,000 of accounts payable at the end of August, $115,500 will be paid in September and $49,500 in October.
Required:
Prepare a cash budget for September, October, and November for Rapid River Company. Show supporting calculations as needed.
Problem 3. Eva Company, a one product mail order firm buys its product for $100 and sells it for $350. The sales staff receives a 20% commission on the sale of each unit. Its March income statement follows:
EVA Company
Income Statement
For Month Ended March 31, 2008
Sales $175,000
Cost of goods sold 50,000
Gross profit $125,000
Expenses
Sales commissions (20%) 35,000
Advertising 5,000
Store rent 8,000
Other expenses 15,000
Total expenses $ 63,000
Net income $ 62,000
The company expects March’s results to be repeated in April, May, and June without any changes in strategy. Management, however has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with April) if the selling price is reduced to $320 per unit and advertising expenses are increased by 25% and remain at that level for all three months. The cost of the product will remain at $ 100 per unit, the sales staff will continue to earn a 20% commission, and the remaining expenses will stay the same.
Required:
1. Prepare a budgeted income statement for each of the months of April, May, and June that shows the expected results from implementing the proposed changes. Use a three-column format with one column for each month.