The company has just hired a new marketing manager who insists that unit sales c
ID: 2530778 • 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
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 90,000 units in any one quarter. Is this a potential problem?
A
B
C
D
E
F
F
1Chapter 8: Applying Excel 2 3DataYear 2 QuarterYear 3 Quarter4 1234125Budgeted unit sales50,000 70,000 120,000 75,000 80,000 100,000 6 7 • Selling price per unit$7per unit 8 • Accounts receivable, beginning balance$65,000 9 • Sales collected in the quarter sales are made75% 10 • Sales collected in the quarter after sales are made25% 11 • Desired ending finished goods inventory is30%of the budgeted unit sales of the next quarter 12 • Finished goods inventory, beginning12,000units 13 • Raw materials required to produce one unit5pounds 14 • Desired ending inventory of raw materials is10%of the next quarter's production needs 15 • Raw materials inventory, beginning23,000pounds 16 • Raw material costs$0.80per pound 17 • Raw materials purchases are paid60%in the quarter the purchases are made 18 and40%in the quarter following purchase 19 • Accounts payable for raw materials, beginning balance$81,500 20
Requirement 2: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:
Explanation / Answer
Question 1
Since 75% of AR is collected in the quarter of the sale and the remaining in the subsequent quarter, the opening AR of $65,500 is assumed to be 25% of the sales from Year 1-Quarter 4 fully collected in Year 2 Quarter 1
Sales of Quarter 1, Quarter 2 and Quarter 3 will be fully collected as well by Quarter 4 Year 2.
(50,000 + 70,000 + 120,000) X $7 = $1,680,000
75% of Quarter 4 sales will be collected in Quarter 4 itself with remaining being uncollected as of the end of Year 2.
75% X 75,000 X $7 = $393,750
The Total Collections is Year 2 is 65,500 + 1,680,000 + 393,750 = $2,139,250
Question 2
The Total Sales for the Year is 50000 + 70000 + 120000 + 75000 = 315,000
The Opening Inventory of Finished Goods is 12,000
The Desired Closing Inventory is 30% of Q1 Year 3 = 30% X 80000 = 24,000
The Production Required for the Year is therefore = Closing + Sales - Opening = 24,000 + 315,000 - 12,000 = 327,000 Units
Question 3
Raw Materials for the Production in 2017 is 327,000 X 5 Pounds = 1,635,000 Units
Opening Raw Materials = 23,000
Expected Closing Raw Materials = 10% X 86,000 X 5 = 43,000
Required of Cost of Raw Materisl to be Purchased = (43,000 + 1,635,000 - 23,000) X $0.80 = $1,324,000
Note: Production Requirement in Q1 Year 3
Opening Inventory from Q4 Year 2 = 24,000
Units Sales = 80,000
Desired Closing Inventory = 30% X 100,000 = 30,000
Units to be Produced in Q1 Year 3 = 30,000 + 80,000 - 24,000 = 86,000
Question 4
The Opening Accounts Payable of $81,500 is paid in Year 2
The Purchases from Q1 to Q3 is also expected to be paid.
Of the Total Purchases during the Year of $1,324,000, Q1 to Q3 purchase is 1,324,000 - 304,400 = 1,019,600
Of the Q4 Purchases of $304,400, 60% is paid in Q4 amounting to $152,500
Hence the Total Disbursements in the Year is $81,500 + $1,019,600 + $152,500 = $1,253,300
Note: Q4 Raw Material Stock Details
Production Requirement = 75,000 X 5 = 375,000
Opening Stock = 10% X 375,000 = 37,500
Closing Stock = 43,000
Total Purchase Requirement in Q4 = (43,000 + 375,000 - 37,500) X 0.8 = 380,500 X 0.8 = 304,400