The company has just hired a new marketing manager who insists that unit sales c
ID: 2406307 • Letter: T
Question
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:
Year 2 Quarter
Year 3 Quarter
A
B
C
D
E
F
F
What are the total expected cash collections for the year under this revised budget?
What is the total required production for the year under this revised budget?
What is the total cost of raw materials to be purchased for the year under this revised budget?
What are the total expected cash disbursements for raw materials for the year under this revised budget?
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 80,000 units in any one quarter. Is this a potential problem?
DataYear 2 Quarter
Year 3 Quarter
1 2 3 4 1 2 Budgeted unit sales 45,000 70,000 110,000 75,000 90,000 95,000 Selling price per unit $7 per unitExplanation / Answer
a) Calculation of Expected Cash Collections for year 2 (Amounts in $)
Therefore total cash collections for the year is $2,033,750.
b) Calculation of Required Production for the Year (in units)
Therefore total required production for the year is 315,000 units.
c) Desired ending raw materials for year 2 = Year 3 Qtr 1 production needs*10%
Year 3 Qtr 1 finished goods required = 90,000+(95,000*30%)-27,000 = 91,500 units
Desired ending raw materials for year 2 = 91,500 units*5 pounds*10% = 45,750 pounds
Total material production needs for the year = 315,000 units*5 pounds = 1,575,000 pounds
Raw material required to purchased = Production needs+Desired ending materials-Beg. materials
= 1,575,000 pounds+45,750 pounds-23,000 pounds = 1,597,750 pounds
Cost of raw material purchased for the year = 1,597,750 pounds*$0.80 per pound
= $1,278,200
d) The Accounts payable in the beginning will be paid in this year, purchases made in quarter 1, quarter 2 and quarter 3 will be wholly paid in this year (i.e. year 2) but 40% of quarter 4 purchase will be outstanding at year end.
Raw material to be purchased in Qtr 4 = Production needs+Desired ending materials-Beg. materials
= (units produced*5 pounds)+Year Ending material-(10% of production needs of current Qtr)
= (79,500 units*5 pounds)+45,750 pounds-(10%*79,500 units*5 pounds)
= 397,500 pounds+45,750 pounds-39,750 pounds = 403,500 pounds
Cost of raw materials purchased in Qtr 4 = 403,500 pounds*$0.80 = $322,800
Total expected cash disbursements for the year
= Beg. Accounts Payable+Purchases-Ending Accounts Payable
= $81,500+$1,278,200-($322,800*40%) = $1,230,580
Therefore total cash disbursements for the year is $1,230,580.
Particulars Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year 2 Accounts Receivable, beg bal 65,000 0 0 0 65,000 Quarter 1 (45,000 units*$7 (75%:25%) 236,250 78,750 0 0 315,000 Quarter 2 (70,000 units*$7) 0 367,500 122,500 0 490,000 Quarter 3 (110,000 units*$7) 0 0 577,500 192,500 770,000 Quarter 4 (75,000 units*$7) 0 0 0 393,750 393,750 Total 301,250 446,250 700,000 586,250 2,033,750