Mark Dalid founded Molid Company three years ago. The company produces PDAs that are compatible with the most operating systems including Palm, MS Windows, and Linux with USB connection and WiFi capability. Since the company’s inception its business has expanded rapidly.

Maria Sanchez, the company’s general accountant, prepared a budget for the fiscal year ending August 31, 2011, based on the prior year’s sales and production activity. In view of the general business slowdown, Mark believes that the sales growth experienced during the prior year will not continue at the same pace. The pro forma statements of income and cost of goods sold prepared as part of the budget processes follow:

On December 10, 2010, Mark and Maria met to discuss the first quarter operating results (September 1 through November 30, 2010). Maria believed that several changes should be made to the original budget assumptions that had been used to prepare the pro forma statements. She prepared the following notes summarizing the changes that had not become known until the first quarter results had been compiled. She submitted the following data to Mark:

a. The estimated production in units for the fiscal year should be revised upward from 162,000 units to 170,000 units with the balance of production being scheduled in equal segments over the last nine months of the fiscal year. Actual first quarter production was 35,000 units.

b. The planned ending inventory for finished goods of 3,300 units at the end of the fiscal year remains unchanged. The finished goods inventory of 9,300 units as of September 1, 2010, had dropped to 9,000 units by November 30, 2010. The finished goods inventory at the end of the fiscal year will be valued at the average manufacturing cost for the year.

c. The direct labor rate will increase 8 percent as of June 1, 2011, as a consequence of a new labor agreement signed during the first quarter. When the original pro forma statements were prepared, the expected effective date for this new labor agreement had been September 1, 2011.

d. Direct materials sufficient to produce 16,000 units were on hand at the beginning of the fiscal year. The plan to have sufficient direct materials inventory at the end of the fiscal year for 18,500 units of production remains unchanged. Direct materials inventory is valued on a first-in, first-out (FIFO) basis. Direct materials equivalent to 37,500 units of output were purchased for $3,300,000 during the first quarter of the fiscal year.

Molid's suppliers have informed the company that direct materials prices will increase 5 percent on March 1, 2011. Direct materials needed for the rest of the fiscal year will be purchased evenly through the last nine months.

e. On the basis of historical data, indirect materials cost is projected at 10 percent of the cost of direct materials consumed.

f. One-half of general factory overhead and all of selling and general administrative expenses are considered fixed in the short run.

After an extended discussion, Dalid asked for new pro forma statements for the fiscal year ending August 31, 2011.

Required

1. Based on the revised data that Maria presented, calculate Molid Company's sales for the year ending August 31, 2011 in (a) number of units sold, and (b) dollar volume of net sales.

2. Prepare the pro forma statement of cost of goods sold for the year ending August 31, 2011, that Mark Dalid had requested.

3. Maria suggests that the firm adopt a JIT strategy to better serve customers and to reduce obsolescence costs. She points out that the firm needs to incorporate new manufacturing technologies to maintain its competitive advantage. Mark is reluctant to make changes because he does not want to upset the proven successful business. He knows that any changes cost money, and he does not want to commit fresh capital just to change the business procedures. Maria argues that no additional capital will be needed to fund the changes. She points out that a JIT system maintains no finished goods inventory and no more materials than those needed to produce 100 units of the finished products.

a. How much will the firm save by changing to a JIT system?

b. Should the firm follow Maria's suggestion?

c. What other factors should be considered in making the decision?

Transcribed Image Text:

MOLID COMPANY Pro Forma Statement of Income (in thousands) For the budget year ended August 31, 2011 $31,248 Net sales Cost of goods sold 20,765 Gross profit $10,483 Operating expenses: Selling $3,200 General administrative 2,200 5,400 $ 5,083 Income from operations before income taxes