Alice Tichenor is an award-winning innovator who makes educational toys for preschool children. Alice's company, which she whimsically named Pumpkin Patch, makes plastic pieces that can be assembled to create imaginative animal and human models. The standard set (which is a "unit") consists of several types of "head gear," "noses," "eyes," "ears," "arms and legs," as well as "foot wear." For the second half of the coming year,, estimated sales in units are:

Month........................ Sales in units

July.................................... 10,000

August................................ 11,400

September............................ 12,000

October............................... 15,600

November............................ 18,000

December............................ 22,000

Alice provides you with the following additional information:

Sales price: Each unit sells for $25. The actual revenues for May and June were $275,000 and $225,000, respectively

Inventory policy for finished goods: Alice's policy for finished goods inventory is to stock 25% of the forecasted demand for the next month. As of June 30, Alice expects to have 2,500 units, valued at $12.50 per unit (the price of plastic only recently decreased, and stabilized to, $3 per pound), in stock. Pumpkin Patch uses the FIFO (First-In-First-Out) method to value its inventories and determine cost of goods sold.

Production requirements: One pound of plastic, at a cost of $3.00 per pound, is required to produce each unit. The cost of all other materials used in production equals $1.00 per unit. Additionally, 0.50 labor hours are required to produce each unit, and labor costs $16 per hour.

Fixed manufacturing overhead is expected to be $48,000 per month. Of this amount, $22,000 represents depreciation and other noncash expenses. Pumpkin Patch does not have any variable manufacturing overhead.

Inventory policy-raw materials: With regard to the plastic used to produce each set, Alice likes to have an ending materials inventory to meet all of the material needs for the next month's anticipated production.

Pumpkin Patch expects to have 10,350 pounds of plastic in inventory as of June 30 (Alice does not maintain inventories of the other materials used in production).

Payables policy: Pumpkin Patch pays for half of its plastics purchases in the month of purchase and the remainder the following month. All other materials are purchased on a cash basis during the month when they are used. Accounts payable for plastics purchases were expected to be $15,000 on June 30.

Collection policy: Forty percent of any month's sales are for cash and the remaining 60% of each month's sales are on credit. Ten percent of the credit sales are collected in the month of sale, 70% are collected the following month, and 18% are collected in the second month after the sale. The remaining 2% of receivables are never collected.

Pumpkin Patch writes off bad debts to the income statement during the month the debt is deemed uncollectible (i.e., two months after the sale occurs). The firm makes no accruals for estimated bad debts in the month of sale.

Sales and administration costs: Monthly non-manufacturing expenses consist of the following:

Salaries and wages .................................$3,000

Commissions........................ 6% of sales revenue

Rent ..................................................$7,000

Other expenses ......................4% of sales revenue

Depreciation ..............$1,500 (for office equipment)

Except depreciation, all nonmanufacturing expenses are paid in cash when incurred. Cash and financing: Pumpkin Patch maintains a minimum cash balance of $15,000. Borrowing can make up any anticipated shortfalls. For simplicity, assume that the bank will only lend (and accept repayments) in $1,000 increments. Ignore interest on the loan in your calculations, and minimize the amount borrowed (i.e., Pumpkin Patch repays its loans as soon as possible). Cash on hand on June 30 is expected to be $16,000.

Special items for cash budget: Pumpkin Patch needs to make a payment of $60,000 during July for equipment previously purchased on credit. The firm also has scheduled a dividend payment of $120,000 in September.

Required:

a. Prepare Pumpkin Patch's contribution margin income statements for July, August, and September.

b. Prepare Pumpkin Patch's cash budgets for July, August, and September.