3. Electra Manufacturing, Inc., produces control valves used in the production of oil field equipment. The control valves are sold to various gas and oil engineering companies throughout the United States. Projected sales in units for the coming four months are as follows: LU January February 20,000 25,000 March April 30,000 30,000 The following data pertain to production policies and manufacturing specifications fol- lowed by Electra: a. Finished goods inventory on January 1 is 13,000 units. The desired ending inventory for each month is 70 percent of the next month's sales. b. The data on materials used are as follows: Direct Material Part 714 Part 502 Per-Unit Usage 5 3 Unit Cost $4 3 C. Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50 percent of that month's estimated sales. This is exactly the amount of material on hand on January 1. The direct labor used per unit of output is two hours. The average direct labor cost per hour is $15. d. Overhead each month is estimated using a flexible budget formula. (Activity is mea- sured in direct labor hours.) Fixed Cost Component Supplies $ Variable Cost Component $1.00 Power 0.20 Maintenance. 28,000 1.10 Supervision 14,000 Depreciation 100,000 Taxes 7,000 Other 56,000 1.60 c. Monthly selling and administrative expenses are also estimated using a flexible bud- geting formula. (Activity is measured in units sold.) Fixed Costs Variable Costs Salaries $30,000 Commissions Depreciation $0.75 5,000 Shipping 2.60 Other 10,000 0.40 f. The unit selling price of the control valve is $90. g. In February, the company plans to purchase land for future expansion. The land costs $90,000. 290 Part Two Fundamental Costing and Control h. All sales and purchases are for cash. Cash balance on January 1 equals $162,900. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid one month later, as is the interest due. The interest rate is 12 percent per annum. Required: Prepare a monthly operating budget for the first quarter with the following schedules: 1. Sales budget 2. Production budget 3. Direct materials purchases budget 4. Direct labor budget 5. Overhead budget 6. Selling and administrative expense budget 7. Ending finished goods inventory budget 8. Cost of goods sold budget 9. Budgeted income statement (ignore income taxes) 10. Cash budget Schedule 3: Direct materials purchases budget January February March Total Part 714 Units to be produced. 24,500 Part 502 24,500 Part 714 Part 502 Part 714 Part 502 Part 714 Part 502 28,500 28,500 x 30,000 5 30,000 x 83,000 5 x 83,000 3 Dir. mat. per unit. 5 5 3 150,000 Production needs 122,500 Desired El 62.500 73,500 37.500 142,500 85,500 75,000 90,000 45,000 415,000 75,000 249,000 45,000 75.000 45.000 225,000 135,000 490,000 294,000 Total needs. 185,000 111,000 217,500 130,500 75,000 45.000 Less: Bl 50,000 30,000 62,500 37,500 150,000 90,000 50,000 440,000 30.000 264,000 Dir. mat. to purchase...... 135,000 81,000 155,000 93,000 $4 x $3 $4 $3 Cost per unit. Total cost. $4 $3 $4 $3 $600,000 $270,000 $1.760,000 $792,000 $540,000 $243,000 $620,000 $279,000