BUDGETS:

Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting up with his senior staff. It was November of 2013 and the group was discussing preparation of the firm’s master budget for 2014. I have decided to go ahead and purchase the industrial robot we have been talking about. We will make the acquisition on January 2 of next year and I expect it will take most of the year to train the personnel and reorganize the production procedure to take full benefit of the new equipment.

In response to a problem regarding financing the acquisition, Rexford replied as follows: The robot will cost $950,000. There will as well be an additional $50,000 in ancillary equipment to be purchased. We will finance such purchases with a one year $1,000,000 loan from Shark Bank and Trust Company. He negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10%, and interest payments will be quarterly as well. With that the meeting broke up and the budget process was on.

Photo Artistry Company is a manufacturer of metal picture frames. The firm’s two product lines are designated as S (small frames; 5×7 inches) and L (large frames; 8×10 inches). The primary raw materials are flexible metal strips and 9 inch by 24 inch glass sheets. Each S frame needs a 2 foot metal strip; an L frame needs a 3 foot metal strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. The other raw materials, like cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Photo Artistry's controller, is in charge of preparing the master budget for 2014. She has gathered the given information:

1) Sales in the fourth quarter of 2013 are predicted to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the preceding quarter. For illustration, S frame sales in the first quarter of 2014 are predicted to be 55,000 units.

2) Photo Artistry's sales history points out that 60% of all sales are on credit, with the remainder of the sales in cash. The company’s collection experience exhibits that 80% of the credit sales are collected throughout the quarter in which the sale is made, while the remaining 20% is collected in the, following quarter. For simplicity, suppose the company is able to collect 100% of its accounts receivable.

3) The S frame sells for $10 and the L frame sells for $15. These prices are predicted to hold constant all through 2014.

4) The production manager attempts to end each quarter with adequate finished goods inventory in each product line to cover 20% of the following quarter’s sales.

5) Photo Artistry makes an attempt to end each quarter with 20% of the glass sheets required for the following quarter's production. The company wants to have an inventory of 10,400 sheets at the end of 2014.

6) Metal strips are purchased locally and the company buys them on a just in time basis.  Inventory of metal strips is negligible.

7) All direct material purchases are made up on account and 80% of each quarter’s purchases are paid in cash throughout the same quarter as the purchase. The other 20% is paid in the next quarter.

8) Indirect materials are purchased with cash as required. Work in process is negligible.

9) Projected manufacturing costs in 2014 are as shown below:

10) Manufacturing equipment depreciation is $20,000 per quarter.

11) Photo Artistry’s quarterly selling and administrative expenses are $100,000, paid in cash.  The company rents all its administrative office space and equipment. Therefore, there is no depreciation associated to the administrative functions of the company.

12) The $1,000,000 loan from Shark Bank and Trust Company will be received on January 1, 2014. Photo Artistry will use all the money instantly to purchase new equipment. Interest payments will be made at the end of each quarter. Loan principal will be paid in four equivalent installments of $250,000 at the end of each quarter.

13) Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

14) Photo Artistry’s projected balance sheet as of December 31, 2013, shown below:

Required:

problem 1: Make Photo Artistry Company’s master budget for 2014 by completing the given schedules:

• Schedule 1: Sales budget with a schedule of expected cash collections.
• Schedule 2: Production budget.
• Schedule 3: Direct materials budget with a schedule of cash disbursements for materials.
• Schedule 4: Direct labor budget.
• Schedule 5: Manufacturing overhead budget
• Schedule 6: Ending finished goods inventory budget.
• Schedule 7: Selling and administrative expenses budget.
• Schedule 8: Cash budget.
• Schedule 9: Budgeted Income Statement.
• Schedule 10: Budgeted Balance Sheet.

problem 2: Make a memo for Photo Artistry Company identifying issues which management must consider in improving the profitability of the company; giving some recommendations.