Question

Arendt Company sells homemade cookies locally for $2.50 per box. The company’s management has prepared the following first quarter sales forecast: January 1,500 February 1,200 March 1,600 For scheduling purposes, the company tries to maintain 10% of the next month’s forecasted sales in its inventory. January’s inventory was in compliance with this policy. Management reports that Arendt’s typical collection history is as follows: 55% of sales collected in the month of sale 35% of sales collected in the month following sale 8% of sales collected in the second month following sale 2% of sales uncollectible Required: 1. Prepare a sales budget for the first quarter. 2. Prepare a production budget for the first quarter. Beginning inventory in January is 150 boxes; April sales are expected to total 1,100 units. 3. Determine the amount of cash to be collected in March.

Answer 1

The sales budget for the first quarter includes sales of $3,750 in January, $3,000 in February, and $4,000 in March. The production budget requires 1,510 boxes in January, 1,150 in February, and 1,600 in March (assuming no inventory required for April). The amount of cash to be collected in March is $5,462.50.

Step-by-step explanation:

To answer the student's question, we need to prepare a sales budget, a production budget for the first quarter, and determine the amount of cash to be collected in March for Arendt Company.

Sales Budget for the First Quarter

January: 1,500 boxes x $2.50 = $3,750
February: 1,200 boxes x $2.50 = $3,000
March: 1,600 boxes x $2.50 = $4,000

Production Budget for the First Quarter

January: Starting inventory + January sales - Ending inventory
Starting inventory = 150 (as 10% of February’s forecasted 1,200 boxes)
Ending inventory = 10% of March sales = 160 boxes
Production needed = 1,500 (sales) + 160 (ending inventory) - 150 (beginning inventory) = 1,510 boxes.

February:
Beginning inventory = January's ending inventory = 160 boxes
Ending inventory = 10% of April sales = 110 boxes
Production needed = 1,200 + 110 - 160 = 1,150 boxes.

March:
Beginning inventory = February's ending inventory = 110 boxes
Ending inventory (for April) is not required for Q1
Production needed = 1,600 + (Ending inventory for Q2 not calculated) - 110 = 1,600 boxes assuming no ending inventory is needed for next quarter.

Cash to be Collected in March

From January sales (35% of $3,750): 0.35 x $3,750 = $1,312.50
From February sales (55% of $3,000 + 8% of $3,750): (0.55 x $3,000) + (0.08 x $3,750) = $1,950
From March sales (55% of $4,000): 0.55 x $4,000 = $2,200
Total cash collected in March: $1,312.50 + $1,950 + $2,200 = $5,462.50