Analyze the prior year Income Statement and current year Master Budget along with the assumptions. Evaluate the budget, identifying errors and correcting both errors and assumptions as needed.

The senior executives at QAB Company want to quickly grow the company, and they need your help. They have provided last years income statement (20X0), assumptions for the current year (20X1), as well as budget information for the current year (20X1). They want to increase revenue, reduce costs, and insure they will receive bonuses for their fine work. See below for the information provided us.

Assumptions for 20X1:

• Increase sales by approximately 43%.
• Keep selling price the same.
• Reduce cost of goods sold by getting a lower cost for materials by buying in larger quantities.
• Reduce labor costs by lowering wages from $11 to $10 per hour.
• Keep Selling and G & A at the same level by giving small pay raises while cutting advertising and commissions to sales personnel.
• The larger net income will allow an increase in dividends to shareholders.

Information from client files shows:

• Senior executives own 35% of the common stock.
• Each year there is a significant turnover of lower level employees.
• Customer returns increase each year due to poor quality workmanship.

The OAB Company Income Statement For the Year Ended December 31, 20X0 Sales (760,000 units @ $30.00) Less: Cost of Goods Sold Gross margin Less: Selling and Administrative expense Operating income Less: Interest expense Net income before taxes Less: Income taxes at 25% Net income after taxes $ 2,000,000 (15,600,000) $ 6,000,000 1,100,000 $ 4,900,000 15,000 $ 4,885,000 1,221,250 $ 3,663,750 The QAB Company Sales Budget For the Year Ended December 31, 20X1 Expected sales in units Unit sales price Total sales 1,000,000 $ 30.00 $ 30,000,000 The QAB Comparvy Production Budget For the Year Ended December 31, 20X1 Planned sales Desired finished goods ending inventory Total needs Less: Beginning finished goods inventory Units to be produced. 1,000,000 50,000 1,650,000 60,000 990,000 The QAB Company Direct Materials Budget For the Year Ended December 31, 20X1 Units to be produced Material needs per unit Production needs (usage) Desired ending inventory of materials Total needs Less: beginning inventory of materials Materials to be purchased Unit price Purchase cost 990,000 4 3,960,000 10,000 3,970,000 40,000 3,930,000 2.00 7,860,000 $ $ The CAB Company Direct Labor Budget For the Year Ended December 31, 20X1 Units to be produced Direct labor hours per unit Total hours Direct labor cost per hour Total direct labor cost 990,000 1 990,000 $ 10 $ 9,900,000 The QAB Company Cost of Goods Sold Budget For the Year Ended December 31, 20X1 Beginning finished goods inventory Add: Cost of Goods Manufactured (990,000 units @ $20) Cost of goods available for sale Less:Desired ending finished goods inventory Cost of Goods Sold $ 60,000 11,495,000 11,555,000 (50,000) $ 11,505,000 The QAB Company Budgeted Income Statement For the Year Ended December 31, 20X1 Sales Less: Cost of Goods Sold Gross margin Less: Selling and Administrative expense Operating income Less: Interest expense Net income before taxes Less: Income taxes at 25% Net income after taxes $ 30,000,000 (11,565,000) $ 18,495,000 1,100,000 $ 17,395,000 5,000 $ 17,390,000 4,347,500 $ 13,042,500