Question

Lane Products, a manufacturer of a popular kitchen utensil, recently underwent expansion, prompting the controller to explore a one-month loan of $46,000 from a local bank starting March 1. The bank proposes an interest rate of 0.5 percent per month, with the requirement to repay both interest and principal by March 31. As part of the loan consideration, the bank has requested a projected income statement and cash budget for March. The following details are available:

- Projected sales for February, April, and May are budgeted at 15,000 units per month, with March set at 12,000 units, each priced at $63. The company offers a 2 percent discount for cash sales. Bad debts historically average 1 percent of credit sales.

- Finished goods inventory on February 1 was 2,700 units, with the desired inventory at month-end set at 25 percent of sales expected for the following month. There is no work in process.

- Raw materials inventory on February 1 was 2,430 pounds, with the month-end inventory not falling below 20 percent of production requirements for the following month. Material purchases are made in 265-pound quantities per shipment.

- Selling expenses amount to 6 percent of gross sales. Administrative expenses, which include $900 monthly depreciation on office furniture and fixtures, total $70,200 per month.

- The manufacturing budget for the utensil, based on normal production of 14,000 units per month, is detailed as 1583/600.

Provide a comprehensive response, including the projected income statement and cash budget for March, considering the outlined information and ensuring accuracy in your calculations.

Answer 1

To project Lane Products' income statement and cash budget for March, the sales, COGS, gross profit, operating expenses, and net income must be calculated, accounting for specific details such as discounts, bad debts, and desired inventory levels. The cash budget must include the one-month loan of $46,000 plus interest, and repayment terms, alongside other expected cash flows.

Step-by-step explanation:

Creating a projected income statement and cash budget requires analyzing various financial elements of Lane Products. For the month of March, we need to calculate sales, cost of goods sold (COGS), gross profit, operating expenses, and net income. To begin, we compute sales, assuming a 2% discount on cash sales and a 1% lost to bad debts. With projected sales of 12,000 units at $63 each, the gross sales amount to $756,000.

We must then determine the ending inventory to calculate COGS. The company maintains a desired finished goods inventory of 25% of the next month's sales, thus for April's 15,000 units, they need 3,750 units in reserve. The manufacturing budget ratio indicates the cost per unit, but further information would be required to finish COGS calculations. Selling expenses are 6% of gross sales, and administrative expenses total $70,200 which includes the monthly depreciation of $900.

Finally, the cash budget for March would include the loan of $46,000, interest expense, and the repayment of the principal by March 31. The interest expense for one month at 0.5 percent amounts to $230. The loan and interest must be considered in the cash budget along with the sales revenue, operating expenses, and cash flows from other operations.