Regis Corporation, a manufacturer of vases to hold flowers, decided in October Year 1 that it needed cash to continue operations.
It began negotiating for a one-month bank loan of $100,000 starting November 1 Year 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on November 30 Year 1. In considering the loan, the bank requested a projected income statement and cash budget for November.
The following information is available:
_ The company budgeted sales at 100,000 units per month in October Year 1, December Year 1, and January Year 2, and at 90,000 units in November Year 1. The selling price is $2 per unit.
_ The inventory of finished goods on October 1 was 24,000 units. The number of units of finished goods inventory at the end of each month equals 20 percent of unit sales anticipated for the following month. There is no work in process.
_ The inventory of raw materials on October 1 was 22,800 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials as needed in minimum quantities of 25,000 pounds per shipment.
_ Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $500 per month on office furniture and fixtures, total $33,000 per month.
_ The manufacturing budget for vases, based on normal production of 100,000 units per month, follows:
Materials (1/2 pound per vase, 50,000 pounds, $2.00 per pound).................... $ 50,000
Labor ..................................................................................................................... 40,000
Variable Overhead................................................................................................. 20,000
Fixed Overhead (includes depreciation of $4,000)................................................ 10,000
Total................................................................................................................... $120,000
a. Prepare schedules computing inventory budgets by months for
(1) Production in units for October, November, and December.
(2) Raw material purchases in pounds for October and November.
b. Prepare a projected income statement for November.