Question - Terry's Towels manufactures the beach towels and sells them to various retailers for $7 each. Each towel requires 2 yards of cotton, which is purchased by Terry's Towels for $2.00 per yard. To prepare for next month's production, Terry's Towels likes to maintain an ending stock of cotton equal to 10% of the production requirements. The company would also like to maintain an ending stock of finished towels equal to 25% of next month's sales.
Sales are projected to be 80,000 for July, 95,000 for August and 60,000 for September.
Terry's Towels expects to sell 50,000 towels in October and needs 125,000 yards of cotton for production.
15% of sales from Terry's Towels to retailers are cash sales, while the remaining 85% are sold on account. Per historical data, 80% of the company's credit sales are collected in the month following the sale, 10% are collected 2 months after the sale, 6% are collected three months after the sale and 4% are never collected.
Sales made in the 2nd quarter (April through June) were comprised of the following:
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Terry's Towels Sales Budget For the Quarter Ended September 30
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Month
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2nd
Quarter
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April
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May
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June
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Type of Sale
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|
|
|
|
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Cash sales
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$67,500
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$80,250
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$82,500
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$230,250
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Credit sales
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382,500
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454,750
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467,500
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1,304,750
|
|
Total sales revenue
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$450,000
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$535,000
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$550,000
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$1,535,000
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The total cost of direct materials purchases in June was $328,000. Terry's Towels pays 45% of its direct materials purchases in the month of purchase and pays the remaining 55% in the month after purchase.
Required - Prepare the production budget.