Storm Tools has formed a new business unit to produce battery-powered drills. Th
ID: 2473637 • Letter: S
Question
Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000). The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month. The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production. The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material. Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred. Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales). Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget. STORM TOOLS Sales Budget For the Three Months January to March January February March Expected Cash Collections From Sales STORM TOOLS Production Budget For the Three Months January to March January February March STORM TOOLS Direct Materials Budget For the Three Months January to March January February March Expected Cash Payments for Materials Purchases STORM TOOLS Direct Labor Budget For the Three Months January to March January February March STORM TOOLS Factory Overhead Budget For the Three Months January to March January February March STORM TOOLS Ending Finished Goods Inventory 31-Mar Units Per Unit Cost Per Unit Total STORM TOOLS Selling, General, and Administrative Budget For the Three Months January to March January February March STORM TOOLS Cash Budget For the Three Months January to March January February March Beginning cash balance Plus: Customer receipts Available cash Less disbursements: Direct materials Direct labor Factory overhead SG&A Total disbursements Cash surplus/(deficit) Financing: Planned repayment Interest on note (1/2% of unpaid balance) Ending cash balance Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000). The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month. The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production. The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material. Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred. Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales). Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget. STORM TOOLS Sales Budget For the Three Months January to March January February March Expected Cash Collections From Sales STORM TOOLS Production Budget For the Three Months January to March January February March STORM TOOLS Direct Materials Budget For the Three Months January to March January February March Expected Cash Payments for Materials Purchases STORM TOOLS Direct Labor Budget For the Three Months January to March January February March STORM TOOLS Factory Overhead Budget For the Three Months January to March January February March STORM TOOLS Ending Finished Goods Inventory 31-Mar Units Per Unit Cost Per Unit Total STORM TOOLS Selling, General, and Administrative Budget For the Three Months January to March January February March STORM TOOLS Cash Budget For the Three Months January to March January February March Beginning cash balance Plus: Customer receipts Available cash Less disbursements: Direct materials Direct labor Factory overhead SG&A Total disbursements Cash surplus/(deficit) Financing: Planned repayment Interest on note (1/2% of unpaid balance) Ending cash balanceExplanation / Answer
January
February
March
April
Note payable opening balance
1000000
950000
900000
850000
Interest .50%
5000
4750
4500
4250
Payment
55000
54750
54500
54250
Closing balacne
950000
900000
850000
800000
Production in units
25000
27500
30000
32500
Each unit raw material requirement (in $)
40
40
40
40
Total raw material (in $)
1000000
1100000
1200000
1300000
Clsoing raw material (in $)
275000
300000
325000
Opening raw material (in $)
0
275000
300000
325000
Raw material purchase (in $)
1275000
1125000
1225000
975000
Raw material purchase payment (in $)
1275000
1125000
1225000
sales (in units)
20000
25000
25000
30000
Seliing preice per unit ( in $)
100
100
100
100
Total sales ( in $)
2000000
2500000
2500000
3000000
Half in cash
1000000
1250000
1250000
1500000
Half in credit
1000000
1250000
1250000
1500000
40% in month of sales
400000
500000
500000
600000
60% in next mont of sales
600000
750000
750000
900000
Production in units
25000
27500
30000
32500
Each drill direct labour (in minuts)
25
25
25
25
Total labour (in minutes)
625000
687500
750000
812500
Total labour (in hours)
10416.7
11458.33
12500
13541.7
Labour rate per hour (in $)
24
24
24
24
Total labour cost
250000
275000
300000
325000
Variable factory OH per hour (in $)
9
9
9
9
Total variable factory OH
93750
103125
112500
121875
Fixed factory OH
25000
25000
25000
25000
Depreciation ( 60%)
15000
15000
15000
15000
Fixed factory OH exluding depreciation
10000
10000
10000
10000
salaries
100000
100000
100000
100000
Office
40000
40000
40000
40000
Advertising
75000
75000
75000
75000
Variable comonesnt 15% of sales
300000
375000
375000
450000
Finished goods in units
5000
2500
5000
2500
Raw material cost 40 per unit
200000
100000
200000
100000
Direct labour hours
2083.33
1041.667
2083.33
1041.67
Labour rate per hour (in $)
24
24
24
24
Total direct labour cost
50000
25000
50000
25000
Factroy overhead per hour
11.73
11.73
11.73
11.73
Total factory overhead
24437.5
12218.75
24437.5
12218.8
Total finished goods cost
274438
137218.8
274438
137219
Cash buget
Opening cash balance
500000
1576250
1768375
2076375
Net cash received (total of green)
2000000
2500000
2500000
3000000
Net cash payment (total of yellow)
923750
2307875
2192000
2401125
clsoing cash balance
1576250
1768375
2076375
2675250
January
February
March
April
Note payable opening balance
1000000
950000
900000
850000
Interest .50%
5000
4750
4500
4250
Payment
55000
54750
54500
54250
Closing balacne
950000
900000
850000
800000
Production in units
25000
27500
30000
32500
Each unit raw material requirement (in $)
40
40
40
40
Total raw material (in $)
1000000
1100000
1200000
1300000
Clsoing raw material (in $)
275000
300000
325000
Opening raw material (in $)
0
275000
300000
325000
Raw material purchase (in $)
1275000
1125000
1225000
975000
Raw material purchase payment (in $)
1275000
1125000
1225000
sales (in units)
20000
25000
25000
30000
Seliing preice per unit ( in $)
100
100
100
100
Total sales ( in $)
2000000
2500000
2500000
3000000
Half in cash
1000000
1250000
1250000
1500000
Half in credit
1000000
1250000
1250000
1500000
40% in month of sales
400000
500000
500000
600000
60% in next mont of sales
600000
750000
750000
900000
Production in units
25000
27500
30000
32500
Each drill direct labour (in minuts)
25
25
25
25
Total labour (in minutes)
625000
687500
750000
812500
Total labour (in hours)
10416.7
11458.33
12500
13541.7
Labour rate per hour (in $)
24
24
24
24
Total labour cost
250000
275000
300000
325000
Variable factory OH per hour (in $)
9
9
9
9
Total variable factory OH
93750
103125
112500
121875
Fixed factory OH
25000
25000
25000
25000
Depreciation ( 60%)
15000
15000
15000
15000
Fixed factory OH exluding depreciation
10000
10000
10000
10000
salaries
100000
100000
100000
100000
Office
40000
40000
40000
40000
Advertising
75000
75000
75000
75000
Variable comonesnt 15% of sales
300000
375000
375000
450000
Finished goods in units
5000
2500
5000
2500
Raw material cost 40 per unit
200000
100000
200000
100000
Direct labour hours
2083.33
1041.667
2083.33
1041.67
Labour rate per hour (in $)
24
24
24
24
Total direct labour cost
50000
25000
50000
25000
Factroy overhead per hour
11.73
11.73
11.73
11.73
Total factory overhead
24437.5
12218.75
24437.5
12218.8
Total finished goods cost
274438
137218.8
274438
137219
Cash buget
Opening cash balance
500000
1576250
1768375
2076375
Net cash received (total of green)
2000000
2500000
2500000
3000000
Net cash payment (total of yellow)
923750
2307875
2192000
2401125
clsoing cash balance
1576250
1768375
2076375
2675250