The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget: Data Year 2 Quarter Year 3 Quarter
1 2 3 4 1 2
Budgeted unit sales 45,000 70,000 120,000 75,000 80,000 90,000
Selling price per unit $7
Accounts receivable,
beginning balance $65,000
Sales collected in the
quarter sales are made 75%
Sales collected in the quarter
after sales are made 25%
Desired ending finished
goods inventory is 30% of the
budgeted unit sales
of the next quarter
Finished goods
inventory, beginning 12,000 units
Raw materials required
to produce one unit 5 pounds
Desired ending inventory
of raw materials is 10% of the next
quarter's production
needs
Raw materials
inventory, beginning 23,000 pounds
Raw material costs $0.80 per pound
Raw materials
purchases are paid 60% in the quarter the
purchases are made and
40% in the quarter
following purchase
Accounts payable for
raw materials, beginning
balance $81,500
A. What are the total expected cash collections for the year under this revised budget?
B. What is the total required production for the year under this revised budget?
C. What is the total cost of raw materials to be purchased for the year under this revised budget?
D. What are the total expected cash disbursements for raw materials for the year under this revised budget?
E. After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 90,000 units in any one quarter. Is this a potential problem?

                                                              Year 2

A. Total expected cash collections   $2,077,500

B. Total required production               312,000 units

C. Total cost of raw materials to be

    purchased for the year                  $1,262,800

D. Total expected cash disbursements for raw materials = $1,220,860

E. There is a potential problem in quarter 3.  This can be resolved by producing more units in the previous quarters.

Explanation:

a) Data and Calculations:

Old selling price per unit = $8

New selling price per unit = $7

                                                                Year 2                            Year 3

                                                                Quarter                         Quarter

                                                1           2             3           4           1            2

Budgeted

unit sales 45,000  70,000   120,000   75,000   80,000   90,000

Sales   $315,000  $490,000  $840,000  $525,000  $560,000  $630,000

Accounts receivable,  beginning balance = $65,000

Desired ending finished  goods inventory is 30% of the  budgeted unit sales  of the next quarter

Finished goods  inventory, beginning = 12,000 units

Raw materials required  to produce one unit = 5 pounds

Desired ending inventory  of raw materials =  10% of the next  quarter's production needs

Raw materials inventory, beginning = 23,000 pounds

Raw material costs $0.80 per pound

Raw materials payments:

60% in the quarter purchases are made  

40% in the quarter  following purchase

Accounts payable for  raw materials, beginning  balance = $81,500

                                         1              2                3                4            Total

Cash collections      

Sales collected:

75% in the quarter  $236,250 $367,500 $367,500  $630,000 $1,601,250

25% second quarter   65,000      78,750    122,500     210,000     476,250

Total collections      $301,250 $446,250 $490,000  $840,000$2,077,500

Production budget:

                                                       Year 2                            Year 3

                                                       Quarter                         Quarter

                                         1           2             3           4           1            2

Budgeted unit sales 45,000  70,000   120,000   75,000   80,000   90,000

Ending inventory       21,000   36,000    22,500  24,000    27,000

Goods available       66,000  106,000   142,500   99,000 107,000

Beginning inventory 12,000    21,000     36,000  22,500   24,000

Production units      44,000    85,000   106,500  76,500   83,000

Total production units for the year = 312,000 units

(44,000 + 85,000 + 106,500 + 76,500)

Purchase of raw materials:

                                                               Year 2                            Year 3

                                                               Quarter                         Quarter

                                              1               2                3                4           1  

Production units               44,000      85,000    106,500     76,500    83,000

Ending inventory              42,500      53,250     38,250      41,500

Raw materials needs     220,000   425,000   532,500   382,500  415,000

Raw materials available 262,500   478,250   570,750   424,000

Beginning inventory        23,000      42,500     53,250     38,250     41,500

Purchases                      239,500   435,750    517,500   385,750

Purchase costs             $191,600 $348,600 $414,000 $308,600

Total purchases = $1,262,800

Cash Disbursements for raw materials:

                                                              Year 2                            Year 3

                                                             Quarter                         Quarter

                                         1               2                3                4           1  

60% in the quarter      $114,960  $209,160  $248,400   $185,160    

40% in the ffg quarter    81,500      76,640     139,440     165,600

Total disbursements  $196,460 $285,800  $387,840  $350,760

Total expected cash disbursements for raw materials = $1,220,860