Question

4. Central, Inc., is a manufacturer of granite paints. Sales are seasonal due to the seasonality in the home-building industry. The expected pattern of sales for the first quarters of 2011 is as follows: Sales in Units 1st quarter 2nd Quarter Quantity 1,200 gallons 800 gallons Additional Information • Inventory of finished goods and raw materials at the end of 2010 were 120 gallons and 240 pounds of respectively. Third quarter sales are predicted to be 1,000 gallons. • Each gallon of paint sells for $280. All sales are on account, and the company’s experience with cash collections is that 75 percent of each quarter’s sales are collected during the same quarter as the sale. The remaining 25 percent of sales is collected in the quarter after the sale. Sales in the last quarter of 2010 were $280,000 (1000 units). • Central desires to have 10 percent of the following quarter’s sales needs in finished-goods inventory at the end of each quarter. • Each tile requires two pounds of raw material. Central desires to have 10 percent of the next quarter’s raw material in inventory at the end of each quarter. • The raw material price is $90 per pound. The company buys its raw material on account and pays 60 percent of the resulting accounts payable during the quarter of the purchase. The remaining 40 percent is paid during the following quarter. (The raw-material purchases in the fourth quarter of 2010 were $260,000.) Required: Calculate a. Sales budget (in dollars); production budget and cash receipts budget for both quarters. b. Direct materials purchases budget and cash disbursements budget for raw material for the first quarter

Answer 1

a.

Sales budget:

1st quarter: 1,200 gallons * $280/gallon = $336,000

2nd quarter: 800 gallons * $280/gallon = $224,000

Production budget:

1st quarter: 1,200 gallons + 10% of 2nd quarter sales needs (800 gallons * 10% = 80 gallons) = 1,280 gallons

2nd quarter: 800 gallons + 10% of 3rd quarter sales needs (1,000 gallons * 10% = 100 gallons) = 900 gallons

Cash receipts budget:

1st quarter: $336,000 * 75% = $252,000

2nd quarter: $224,000 * 75% = $168,000

b.

Direct materials purchases budget:

1st quarter: 1,280 gallons * 2 pounds/gallon = 2,560 pounds

Raw material needed: 2,560 pounds + 10% of 2nd quarter raw material needs (2,560 pounds * 10% = 256 pounds) = 2,816 pounds

Cost of raw material: 2,816 pounds * $90/pound = $253,440

Cash disbursements budget:

1st quarter: $253,440 * 60% = $152,064