Question: Banana Inc. manufactures and sells robot toys. On 31 March 2017, the company needs to prepare a master budget for the next fiscal quarter ending June 30th. Banana Inc. managed to sell 1,000 units of robot toys in March at a price of $190. To scale up the current business, Banana Inc. decides to buy a new equipment that costs $95,400 in the beginning of the next quarter.
Expected unit sales for the upcoming months are as follows:
April May June July August
Budgeted unit sales 1100 1500 1300 1200 1450
The selling price remains at $190. Twenty percent of the company's sales are for cash and 80% are on account. Collections for sales on account follow a stable pattern as follows: 60% of a month's credit sales are collected in the month of sale, and 30% are collected in the month following sale. The remainder are uncollectible. The sales collection in past months also followed this pattern.
Past experience has shown that the ending inventory of finished goods for each month should be equal to 20% of the next month's sales in units.
Each unit of product requires three pounds of specialized material. The company has a policy of maintaining an ending inventory at the end of each month equal to 10% of the next month's production needs. This requirement had been met on April 1 of the current year.
Material cost is $5 per pound. 60% of a month's purchases is paid for in the month of purchase; the remaining is paid in the following month. The March 31 accounts payable balance is $6,200.
Each unit of output requires 1.2 direct labor-hours. The direct labor rate is $20 per direct labor-hour. The company guarantees its direct labor workers a 30-hour paid work week. With the number of workers currently employed, that means that the company is committed to paying its direct labor work force for at least 1,500hours in total each month even if there is not enough work to keep them busy.
Banana Inc. bases its manufacturing overhead budget on budgeted direct labor-hours worked. The variable overhead rate is $15 per direct labor-hour worked. The company's budgeted fixed manufacturing overhead is $102,950 per month, which includes depreciation of $19,880. All other fixed manufacturing overhead costs represent current cash flows.
The selling and administrative expense budget of Banana Inc. is based on budgeted unit sales. The variable selling and administrative expense is $1.2 per unit. The budgeted fixed selling and administrative expense is $51,520 per month, which includes depreciation of $9,800 per month. All other selling and administrative expenses are paid as incurred.
Banana Inc. schedules a dividend payout to shareholders on 28th May, with a total amount $10,000. To finance potential cash deficit, Banana Inc. plans to borrow a loan from its relationship bank at the beginning of April. The loan principal amounts to $60,000. Banana Inc. needs to repay the principal and the interest on 30th June. The interest would be $1,500 at the end of three months.
Problems: For the three-month period ending June 30th,
(1) Prepare the schedule of cash collections from sales and the schedule of cash disbursement for materials, labor, overhead, and selling and administrative expenses, for each month and for the entire quarter.
(2) Prepare a complete cash budget for each month and for the entire quarter. Banana Inc. expects to have $50,000 of cash on hand at the beginning of April.
(3) The marketing manager suggests increasing the monthly advertising budget by $25,000, which hopefully can increase unit sales for each future month by 20% (including April). All else are not affected.
a) If this suggestion is adopted, how does it affect the cash budget?
b) If this suggestion is adopted, how does it affect the projected net income? [In determining the cost of goods sold, calculate the unit product cost under absorption costing.]