Mercer Farm Supply Company manufactures and sells a fertilizer called Basic II. The following data are available for preparing budgets for Basic II for the first 2 quarters of 2014.

1 Sales: quarter 1, 40,000 bags; quarter 2, 50,000 bags. Selling price is $63 per bag.

2 Direct materials: each bag of Basic II requires 5 pounds of Crup at a cost of $3.80 per pound and 10 pounds of Dert at $1.50 per pound.

3 Desired inventory levels:

Type of Inventory January 1 April 1 July 1 Basic II (bags) 10,000 15,000 20,000 Crup (pounds) 9,000 12,000 15,000 Dert (pounds) 15,000 20,000 25,000 4 Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $12 per hour.

5 Selling and administrative expenses are expected to be 10% of sales plus $150,000 per quarter.

6 Income taxes are expected to be 30% of income from operations.

Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows expected costs to be 100% of direct labor cost. (2) The direct materials budget for Dert which shows the cost of Dert to be $682,500 in quarter 1 and $832,500 in quarter 2.

Instructions Prepare the budgeted income statement for the first 6 months of 2014 and all required supporting budgets by quarters. (Note: Use variable and fixed in the selling and administrative expense budget.) Do not prepare the manufacturing overhead budget or the direct materials budget for Dert.

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