Andrews Solvents, Inc. manufactures a single product, Endless Klean (EK), a cleaning solvent that removes oil based paints, lacquers and varnishes without damaging surfaces. It is also environmentally friendly.  Endless Klean is sold only in one gallon containers.

This year, 2023, Andrews has prospered, with projected pretax earnings of over $1.1 million on sales of $6.84 million.  Management is now in the process of planning next year's activity.  The marketing department has been exploring several avenues for 2024.  2023's healthy sales resulted from a modest advertising and promotional expenditure of $188,000 spread over the year.  Marketing management now believes that a concerted digital media campaign in 2024 (that would increase selling and administrative expenses by $125,000) could substantially boost unit sales by as much as 17 percent over the year they refer to this as marketing plan A.  

The production department has also proposed a change for 2024.  It has suggested that capacity should be boosted from the current 750,000 gallons to 1.1 million gallons.  The changes made for this expansion would also reduce variable manufacturing overhead to $1.95 per gallon.  The cost of the expansion would be $500,000, consisting mainly of equipment to be purchased in the first quarter of 2024 and to be paid for in March.  This increase to plant and equipment would be depreciated over a ten-year period, using the straight line method with no salvage value.  A full year's depreciation would be expensed in the first year.  

Andrews has the following policies/practices:  Ending finished goods inventory generally equals one month's sales.  Raw materials are purchased and delivered on a justintime basis, so no inventory should exist.  Payments on account of purchases of raw material are generally paid in the month following that in which they are incurred.  All other expenditures are paid as incurred.  Accounts receivable are usually collected 50% in the month of sale, 50% in the month following.  All sales are on credit.

The statement of cost of goods manufactured and sold for 2023 and the 2023income statement (both prepared in October 2023 and reflecting best available estimates at the time) are attached, along with some additional data.

 

Andrews Solvents, Inc.  

Data Table 2023

Sales (gallons) 570,000

Selling Price $12.00

Fixed Selling & Admin Expenses $986,000.00

(includes depreciation of $36,000)

Commissions (as % of Sales Dollars) 5.00%

Shipping (as % of Sales Dollars)3.00%              

Variable Manufacturing Costs (per unit):

Direct Materials $4.00

Direct Labor $1.00          

Variable Overhead $2.00

Fixed Manufacturing Costs (total,$180,000.00

includes depreciation of $60,000)

   

Total Production (gallons) 600,000

December's Production (gallons) 51,000

Inventory Summary: (gallons)

 Finished Goods Inventory, Jan 1 21,000

 Finished Goods Inventory, Dec 31 51,000

           

Budgeted cash balance, Dec 31 $50,000

 

Andrews Solvents, Inc.

Statement of Cost of Goods Manufactured & Sold

for the Year Ended December 31, 2023

   

Cost of Goods Manufactured:                                          

Direct Materials $2,400,000.00

Direct Labor     600,000.00

Variable Overhead  1,200,000.00

Fixed Manufacturing Cost      180,000.00

$4,380,000.00

Add:                                                            

Finished Goods Inventory Jan 1     198,000.00

Total Available for Sale$4,578,000.00

 Less:

Finished Goods Inventory Dec 31   (372,300.00)

Cost of Goods Sold $4,205,700.00

 

Income Statement

for the Year Ended December 31, 2023

 

Sales$6,840,000.00

less: Cost of Goods Sold(4,205,700.00)

Gross Margin $2,634,300.00

Fixed Selling & Admin Expense (986,000.00)

Variable Selling & Admin Expense (547,200.00)

Operating Income $1,101,100.00

 

Requirements

1. Andrews is concerned that the expansion of production capacity may require the company to seek external sources of financing.  Make a cash budget for the first quarter of 2024 (i.e., schedule the cash inflows and outflows for the quarter).  What is the amount of financing that Andrews will need to arrange for the quarter?  (You may find it useful to start by preparing a production schedule/budget for the first quarter).

2. Andrews needs to know what income will be generated for next year.  Make a statement of budgeted cost of goods manufactured and cost of goods sold for the year2024. Please prepare a budgeted income statement for 2024.

3. Assume that the marking department followed refers to the plan to increase the marketing budget by $125,000 as Plan A. Also assume it has an alternative marketing plan (Plan B) to reduce the price per gallon of Endless Klean by $1.  They expect that sales would increase by 20 percent over the 2023 level, even without additional levels of advertising expenditures.  Make a budgeted income statement for 2024 under this scenario.

4. Should Andrews accept marketing Plan A or Plan B? Please explain.