. ANSWERS TO THE FIRST PART OF THE CASE: Presented below is one possible answer to this case using only information provided in the case with the following assumptions: 1) the milkshake's sales-mix will be 60% large and 40% small, 2) the suggested sales prices are used to be competitive with other vendors, and 3) the milkshake makers, tables and benches are assumed to last for 3 years, but the refrigerator/freezer and counter tops are assumed to last for 10 years and the sign is assumed to last only one year. Since this is a simulation exercise, the case allows students to see how the break-even sales volume changes depending upon different assumptions about product sales-mix, sale prices, depreciable lives of long-term assets as well as variable costs, and allows them to add other necessary fixed costs to the cost structure of the business conditional on their own unique business strategy. Consequently, their answers may vary. Monthly fixed costs: Salary of 2 part-time workers 1,600.00 Rental 500.00 Supplies 100.00 Milk Shake Maker depreciation 20.00 (720/ 36months) Refrigerator/freezer depreciation 4.00 (480/120 months) Counter tops depreciation 10.00 (1,200/120months) Tables and benches depreciation 30.00 (1,080/36 months) Annual insurance 50.00 (600/12months) Interest on loan 101.24 Advertising expense 5,000.00 Accounting and bookkeeping expense 500.00 Owner's salary and benefits 8,000.00 Dues and membership fees 167.00 Licenses and permit fees 50.00 Maintenance services 400.00 Office supplies 300.00 Sign 8.37 (100/12months) Total monthly Fixed Costs $16,840.61 . . Variable Costs per unit: Ingredient Cost Whole milk $15 for 640 oz. Cream $20 for 128 oz. Sugar $10 for 30 cups Premium Vanilla Ice Cream $24 for 600 oz. Flavorings Flavored Specialty Straws Cups-8 ounces $200 for 500 cups Cups-12 ounces $250 for 500 cups TOTAL DIRECT MATERIAL COST PER UNIT 0.02344 per oz. 0.15625 per oz. 0.33333 per cup 0.04000 per oz. Small Large 0.05 0.07 0.31 0.47 0.17 0.25 0.24 0.36 0.25 0.40 0.75 0.75 0.40 0.50 $2.17 $2.80 0.40000 per cup 0.50000 per cup Variable Cost Income Statement: using a 40% (small) and 60% (large) sales-mix in determining the break-even sales volume: Small (40%) Large (60%) Weighted total Sales after taking out the 10% owed $7*90%=6.3*40%= $10*90%=$9*60%= | 7.920 per unit to resort 2.520 5.400 Variable cost 2.17*40%=.868 2.80*60%=1.680 2.548 per unit Contribution margin 1.652 3.720 5.372 per unit Total Fixed costs 16,840.61 per month 1) You will need to sell 3,135 milkshakes/month to break even = ($16,840.61/5.372) 1,254 (3,135*40%) will be small and 1,881 (3,135*60%) will be large. = Variable Cost Income Statement: using 40% (small) and 60% (large) sales-mix in determining the break-even sales volume (no salary allowance for owner): Small (40%) Large (60%) Weighted total Sales after taking out 10% $6.30*1,254milkshakes $9*1,881milkshakes $24,829.20 owed to resort $7,900.20 $16,929.00 - Variable cost $2.17*1,254milkshakes $2.80*1,881milkshakes $ 7,987.98 $2,721.18 $5,266.80 Contribution margin $5,179.02 $11,662.20 $16,841.22 Total Fixed costs $16,840.61 Net Income 0.61 rounding error REQUIREMENTS OF THE SECOND PART OF THE CASE The second part of this case is intended to demonstrate the importance of using a BUDGET process to plan, direct and control the organization.. 1) Using assumptions you made in the first part of the case regarding, sales price per unit, variable costs per unit and total fixed costs, as well as the information about sales volume presented below, prepare the following budgets for the first quarter: Sales budget Production budget Direct materials budget for JUST THE MILK - to save time I filled in the other raw material budgets necessary to make milk shakes Manufacturing Overhead budget Operating budget 2) Using the information from the budgets you prepared above, prepare a projected Income Statement for the first month. . O . The Sales Budget must be prepared first as it affects all the other budgets. In order to prepare the sales budget an estimate of the expected number of units to be sold and the expected sales price needs to be determined. To prepare the sales budget we used the following assumptions. Statistics for tourism in Hawaii are available from the www.hawaiitourismauthority.org and the Department of Business, Economic Development and Tourism of the State of Hawaii (Hawaii.gov/debdt). Number of visitors to the island from January 2007 to May 2007 were 125,000, 125,000, 150,000, 125,000 and 125,000, respectively. (For simplicity, we assume each visitor, on average, purchases one milk shake. (Students can get more elaborate and research the average number of days visitors stay and the average number of couples, versus families with kids). The sales mix and the sales price will be consistent with the first part of the case at 40% small and 60% large with the sales price set at the competitors price of $10 for large and $7 for small (less the resort fee of 10%). January February March 1slqtr Total April May SALES BUDGET for 1st qtr Large shakes expected to be sold: (visitors*.60) Expected sales price ($10*90%) Total sales ($) Small shakes expected to be sold: (visitors * .40) Expected sales price ($7*90%) Total sales ($) TOTAL SALES The next budget to be prepared is the Production budget, where the number of milk shakes needed to be produced (based on the sales budget) are determined. This will equal: Number of milk shakes expected to be sold + safety stock (ending finished goods inventory) in case demand is higher than predicted Total milk shakes needed Less: Beginning finished goods inventory (which is zero at the start of business) Milk shakes needed to be produced To prepare the production budget we used the following assumptions: 10% of next months expected milk shake sales is desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. . January February March 1st Qtr total April PRODUCTION BUDGET - 1st QTR Large shakes (sales budget) + desired ending inventory Total needed Less: beginning inventory Large shakes to produce January February March 1st Qtr total April PRODUCTION BUDGET - 1st QTR Small shakes (sales budget) + desired ending inventory Total needed Less: beginning inventory Small shakes to produce After the number of milk shakes needed to be produced is determined, we can plan for the amount of direct materials, direct labor and manufacturing overhead that will be needed. A DIRECT MATERIALS budget will need to be produced for each ingredient used to make the milk shakes. The direct materials budget for whole milk was prepared using the following assumptions: 10% of next months expected milk needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of whole milk was determined to be $0.02344 per ounce . Milk Purchases Budget - 1" quarter Large Milk Shake Production Milk required per shake (ounces) Ounces Needed for Large Milk Shake Production Small Milk Shake Production Milk required per shake (ounces) Ounces needed for Small Milk Shake Production Total Ounces Required for Production Plus: Desired ending Inventory Total Ounces Available Less: Beginning Inventory Total Ounces to be purchased Cost per Ounce Total Cost of Milk to be purchased DIRECT MATERIALS BUDGET - CREAM. The direct materials budget for cream was prepared using the following assumptions: . 10% of next months expected cream needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of cream was determined to be $0.15625 per ounce Cream Purchases budget - 14 Quarter January February March Total April Large Milk Shake production 82,500 76,500 88,500 247,500 75,000 Cream required per shake(ounces) 3 ounces 3 ounces 3 ounces 3 ounces 3 ounces Ounces Needed for Large Milk Shake 247,500 229,500 265,500 742,500 225,000 Production Small Milk Shake Production 55,000 51,000 59,000 165,000 50,000 Cream required per sbake(ounces) 2 ounces 2 ounces 2 ounces 2 ounces 2 ounces Ounces Needed for Small Milk Shake 110,000 102,000 118,000 330,000 100,000 Production Total Ounces Required for Production 357,500 331,500 383,500 1,072,500 325,000 Plus: Desired Ending Inventory 33,150 38,350 32,500 32,500 32,500 Total Ounces Available 390,650 369,850 416,000 1,105,000 357,500 Less: Beginning Inventory -0- 33,150 38,350 -0- 32,500 Total Ounces to be purchased 390,650 336,700 377,650 1,105,000 325,000 Cost per Ounce $0.15625 $0.15625 $0.15625 $0.15625 $0.15625 Total Cost of Cream to be Purchased $61,039.06 $52,609.38 $59,007.81 $172,656.25 $50,781.25 DIRECT MATERIALS BUDGET - SUGAR. The direct materials budget for sugar was prepared using the following assumptions: 10% of next months expected sugar needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of sugar was determined to be $0.33333 per cup. 3/4 cup 3/4 cup 1/2 cup 1/2 cup Sugar Purchases Budget - 19 Quarter January February March Total April Large Milk Shake Production 82,500 76,500 88,500 247,500 75,000 Sugar required per shake (in cups) cup 3/4 cup 4 cup Cups Needed for Large Milk Shake 61,875 57,375 66,375 185,625 56,250 Production Small Milk Shake Production 55,000 51,000 59,000 165,000 50,000 Sugar required per sbake (in cups) 1/2 cup 22 cup 12 cup Cups Needed for Small Milk Shake 27,500 25,500 29,500 82,500 25,000 Production Total Cups Required for Production 89,375 82,875 95,875 268,125 81,250 Plus: Desired Ending Inventory 8,288 9,588 8,125 8,125 8,125 Total Cups Available 97,663 92,463 104,000 276,250 89,375 Less: Beginning Inventory -0- 8,288 9,588 -0- 8,125 Total Cups to be purchased 97,663 84,175 94,412 276,250 81,250 Cost per Cup $ 0.33333 $ 0.33333 $ 0.33333 $ 0.33333 $ 0.33333 Total Cost of Sugar to be Purchased $32,554.01 $28,058.05 $31,470.35 $92,082.41 $27,083.06 DIRECT MATERIALS BUDGET - ICE CREAM. The direct materials budget for ice cream was prepared using the following assumptions: 10% of next months expected ice cream needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of ice cream was determined to be $0.04 per ounce. Total 247,500 9 ounces 2,227,500 April 75,000 9 ounces 675,000 165,000 6 ounces 990,000 50,000 6 ounces 300,000 Ice Cream Purchases Budget - 14 Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Ice Cream Required per shake 9 ounces 9 ounces 9 ounces Ounces needed for Large Milk 742,500 688,500 796,500 Shake Production Small Milk Shake Production 55,000 51,000 59,000 Ice Cream Required per shake 6 ounces 6 ounces 6 ounces Ounces needed for Small Milk 330,000 306,000 354,000 Shake Production Total Ounces Required for 1,072,500 994,500 1,150,500 Production Plus: Desired Ending Inventory 99,450 115,050 97,500 Total Ounces Available 1,171,950 1,109,550 1,248,000 Less: Beginning -0- 99,450 115,050 Total Ounces to be purchased 1,171,950 1,010,100 1,132,950 Cost per ounce $ 0.04 $ 0.04 Total Cost of Ice Cream to be $46,878.00 $40,404.00 $45,318.00 Purchased 3,217,500 975,000 97,500 3,315,000 -0- 3,315,000 $ 0.04 $132,600.00 97,500 1,072,500 97,500 975,000 $ 0.04 $39,000.00 $ 0.04 DIRECT MATERIALS BUDGET - FLAVORINGS. The direct materials budget for flavorings was prepared using the following assumptions: . 10% of next months expected flavoring needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of flavorings was $ 0.40 for a large shake and $ 0.25 for a small shake. . Flavorings Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Plus: Desired Ending Inventory 7,650 8,850 7,500 Total Available 90,150 85,350 96,000 Less: Beginning Inventory -0- 7,650 8,850 Total to be purchased 90,150 77,700 87,150 Cost per unit $ 0.40 $ 0.40 $ 0.40 Total Cost of Flavorings to be $36,060.00 $31,080.00 $34,860.00 Purchased for Large Milk Shakes Total 247,500 7,500 255,000 -0- 255,000 $ 0.40 $102,000.00 April 75,000 7,500 82,500 7,500 75,000 $ 0.40 $30,000.00 Small Milk Shake Production Plus: Desired Ending Inventory Total Available Less: Beginning Inventory Total to be Purchase Cost per unit Total Cost of Flavorings to be Purchased for Small Milk Shakes 55,000 5,100 60,100 -0- 60,100 $ 0.25 $15,025.00 51,000 5,900 56,900 5,100 51,800 $ 0.25 $12,950.00 59,000 5,000 64,000 5,900 58,100 $ 0.025 $14,525.00 165,000 50,000 5,000 5,000 170,000 55,000 -0- 5,000 170,000 50,000 $ 0.25 $ 0.25 $42,500.00 $12,500.00 $51,085.00 $44,030.00 $49,385.00 $144,500.00 $42,500.00 Total Cost of Flavorings to be Purchased for ALL Milk Shakes DIRECT MATERIALS BUDGET-STRAWS. The direct materials budget for straws was prepared using the following assumptions: 10% of next months expected straw needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost per straw is $ 0.75. . Straws Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Small milk shake Production 55,000 51,000 59,000 Total straws Required for Production 137,500 127,500 147,500 Plus: Desired Ending Inventory 12,750 14,750 12,500 Total Available 150,250 142,250 160,000 Less: Beginning Inventory -0- 12,750 14,750 Total Straws to be purchased 150,250 129,500 145,250 Cost per straw $ 0.75 $ 0.75 $ 0.75 Total cost of straws to be purchased $112,687.50 $97,125.00 $108,937.50 Total 247,500 165,000 412,500 12,500 425,000 -0- 425,000 $ 0.75 $318,750.00 April 75,000 50,000 125,000 12,500 137,500 12,500 125,000 $ 0.75 $93,750.00 DIRECT MATERIALS BUDGET-CUPS. The direct materials budget for cups was prepared using the following assumptions: 10% of next months expected cup needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost per cup is $ 0.50 for a large shake and $ 0.40 for a small shake. . Cups Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Plus: Desired Ending Inventory 7,650 8,850 7,500 Total Available 90,150 85,350 96,000 Less: Beginning Inventory -0- 7,650 8,850 Total cups to be Purchased 90,150 77,700 87,150 Cost per Cup $ 0.50 $ 0.50 $ 0.50 Total Cost of Cups to be purchased $45,075.00 $38,850.00 $43,575.00 Total 247,500 7,500 255,000 -0- 255,000 $ 0.50 $127,500.00 April 75,000 7,500 82,500 7,500 75,000 $ 0.50 $37,500.00 Cups Purchases Budget - 14 Quarter January February March Small Milk Shake Production 55,000 51,000 59,000 Plus: Desired Ending Inventory 5,100 5,900 5,000 Total Available 60,100 56,900 64,000 Less: Beginning Inventory -0- 5,100 5,900 Total cups to be Purchased 60,100 51,800 58,100 Cost per Cup $ 0.40 $ 0.40 $ 0.40 Total Cost of Cups to be purchased $24,040.00 $20,720.00 $23,240.00 Total 165,000 5,000 170,000 -0- 170,000 $ 0.40 $68,000.00 April 50,000 5,000 55,000 5,000 50,000 $ 0.40 $20,000.00 MANUFACTURING OVERHEAD BUDGET First, we need to determine whether each manufacturing overhead expense is variable or fixed. It has been determined that all the manufacturing overhead costs are fixed, although salary of part-time workers and utilities can be variable or mixed expenses as well. March Total Manufacturing Overhead Budget - 1Quarter January February Fixed manufacturing overhead costs: Salary of 2 part-time workers Rent and utilities expense Supplies for making milk shakes Depreciation - milk shake maker Depreciation - refrigerator/freezer Depreciation - counter tops TOTAL FIXED COSTS OPERATING BUDGET First we need to determine whether each operating budget expense is variable or fixed. It has been determined that all the operating costs are fixed. March Total Operating Budget - 14 Quarter January February Fixed operating expenses: Depreciation - tables and benches Insurance expense Interest expense Advertising expense Accounting and bookkeeping expense Owner's salary expense Dues and membership expense Licenses and Permits expense Maintenance expense Office supplies expense Depreciation - sign TOTAL FIXED COSTS So what is the BUDGETED MANUFACTURING COST FOR ONE UNIT: Direct Materials Variable Costs per unit: Ingredient Cost Whole milk $15 for 640 oz. Cream $20 for 128 oz. Sugar $10 for 30 cups Premium Vanilla Ice Cream $24 for 600 oz. Flavorings Flavored Specialty Straws Cups-8 ounces $200 for 500 cups Cups-12 ounces $250 for 500 cups TOTAL DIRECT MATERIAL COST PER UNIT 0.02344 per oz. 0.15625 per oz. 0.33333 per cup 0.04000 per oz. Small Large 0.05 0.07 0.31 0.47 0.17 0.25 0.24 0.36 0.25 0.40 0.75 0.75 0.40 0.40000 0.50000 per cup per cup 0.50 $2.17 $2.80 LARGE MILK SHAKES per the PRODUCTION budget we expect to produce 1,580,000 in the first Year: (125,000+125,000+150,000+125,000+125,000+150,000+160,000+150,000+110,000+110,000 +110,000+140,000) (1) Direct materials cost per milk shake: 2.80 (2) Manufacturing overhead: Fixed ($2,234.00 *12months * 60% per quarter)/ 1,580,000 = milk shakes 0.01 Cost of manufacturing each large milk shake $2.81 SMALL MILK SHAKES per the PRODUCTION budget we expect to produce 165,000 in the first quarter. (1) Direct materials cost per milk shake: 2.17 (2) Manufacturing overhead: Fixed ($2,234.00 * 12 months * 40% per quarter)/ 1,580,000 = milk shakes 0.01 $2.18 Cost of manufacturing each small milk shake PROJECTED INCOME STATEMENT - MONTH OF JANAURY Large (60%) Small (40%) Number of milk shakes expected to be sold 75,000 50,000 Sales price per milk shake (less resort fee) $9.00 $6.30 Cost of goods sold per milk shake $2.81 $2.18 Total 125,000 Sales Less: cost of goods sold Gross Profit Less: Operating expenses Operating Income Income tax expense (income tax rate = 35%) Net Income . ANSWERS TO THE FIRST PART OF THE CASE: Presented below is one possible answer to this case using only information provided in the case with the following assumptions: 1) the milkshake's sales-mix will be 60% large and 40% small, 2) the suggested sales prices are used to be competitive with other vendors, and 3) the milkshake makers, tables and benches are assumed to last for 3 years, but the refrigerator/freezer and counter tops are assumed to last for 10 years and the sign is assumed to last only one year. Since this is a simulation exercise, the case allows students to see how the break-even sales volume changes depending upon different assumptions about product sales-mix, sale prices, depreciable lives of long-term assets as well as variable costs, and allows them to add other necessary fixed costs to the cost structure of the business conditional on their own unique business strategy. Consequently, their answers may vary. Monthly fixed costs: Salary of 2 part-time workers 1,600.00 Rental 500.00 Supplies 100.00 Milk Shake Maker depreciation 20.00 (720/ 36months) Refrigerator/freezer depreciation 4.00 (480/120 months) Counter tops depreciation 10.00 (1,200/120months) Tables and benches depreciation 30.00 (1,080/36 months) Annual insurance 50.00 (600/12months) Interest on loan 101.24 Advertising expense 5,000.00 Accounting and bookkeeping expense 500.00 Owner's salary and benefits 8,000.00 Dues and membership fees 167.00 Licenses and permit fees 50.00 Maintenance services 400.00 Office supplies 300.00 Sign 8.37 (100/12months) Total monthly Fixed Costs $16,840.61 . . Variable Costs per unit: Ingredient Cost Whole milk $15 for 640 oz. Cream $20 for 128 oz. Sugar $10 for 30 cups Premium Vanilla Ice Cream $24 for 600 oz. Flavorings Flavored Specialty Straws Cups-8 ounces $200 for 500 cups Cups-12 ounces $250 for 500 cups TOTAL DIRECT MATERIAL COST PER UNIT 0.02344 per oz. 0.15625 per oz. 0.33333 per cup 0.04000 per oz. Small Large 0.05 0.07 0.31 0.47 0.17 0.25 0.24 0.36 0.25 0.40 0.75 0.75 0.40 0.50 $2.17 $2.80 0.40000 per cup 0.50000 per cup Variable Cost Income Statement: using a 40% (small) and 60% (large) sales-mix in determining the break-even sales volume: Small (40%) Large (60%) Weighted total Sales after taking out the 10% owed $7*90%=6.3*40%= $10*90%=$9*60%= | 7.920 per unit to resort 2.520 5.400 Variable cost 2.17*40%=.868 2.80*60%=1.680 2.548 per unit Contribution margin 1.652 3.720 5.372 per unit Total Fixed costs 16,840.61 per month 1) You will need to sell 3,135 milkshakes/month to break even = ($16,840.61/5.372) 1,254 (3,135*40%) will be small and 1,881 (3,135*60%) will be large. = Variable Cost Income Statement: using 40% (small) and 60% (large) sales-mix in determining the break-even sales volume (no salary allowance for owner): Small (40%) Large (60%) Weighted total Sales after taking out 10% $6.30*1,254milkshakes $9*1,881milkshakes $24,829.20 owed to resort $7,900.20 $16,929.00 - Variable cost $2.17*1,254milkshakes $2.80*1,881milkshakes $ 7,987.98 $2,721.18 $5,266.80 Contribution margin $5,179.02 $11,662.20 $16,841.22 Total Fixed costs $16,840.61 Net Income 0.61 rounding error REQUIREMENTS OF THE SECOND PART OF THE CASE The second part of this case is intended to demonstrate the importance of using a BUDGET process to plan, direct and control the organization.. 1) Using assumptions you made in the first part of the case regarding, sales price per unit, variable costs per unit and total fixed costs, as well as the information about sales volume presented below, prepare the following budgets for the first quarter: Sales budget Production budget Direct materials budget for JUST THE MILK - to save time I filled in the other raw material budgets necessary to make milk shakes Manufacturing Overhead budget Operating budget 2) Using the information from the budgets you prepared above, prepare a projected Income Statement for the first month. . O . The Sales Budget must be prepared first as it affects all the other budgets. In order to prepare the sales budget an estimate of the expected number of units to be sold and the expected sales price needs to be determined. To prepare the sales budget we used the following assumptions. Statistics for tourism in Hawaii are available from the www.hawaiitourismauthority.org and the Department of Business, Economic Development and Tourism of the State of Hawaii (Hawaii.gov/debdt). Number of visitors to the island from January 2007 to May 2007 were 125,000, 125,000, 150,000, 125,000 and 125,000, respectively. (For simplicity, we assume each visitor, on average, purchases one milk shake. (Students can get more elaborate and research the average number of days visitors stay and the average number of couples, versus families with kids). The sales mix and the sales price will be consistent with the first part of the case at 40% small and 60% large with the sales price set at the competitors price of $10 for large and $7 for small (less the resort fee of 10%). January February March 1slqtr Total April May SALES BUDGET for 1st qtr Large shakes expected to be sold: (visitors*.60) Expected sales price ($10*90%) Total sales ($) Small shakes expected to be sold: (visitors * .40) Expected sales price ($7*90%) Total sales ($) TOTAL SALES The next budget to be prepared is the Production budget, where the number of milk shakes needed to be produced (based on the sales budget) are determined. This will equal: Number of milk shakes expected to be sold + safety stock (ending finished goods inventory) in case demand is higher than predicted Total milk shakes needed Less: Beginning finished goods inventory (which is zero at the start of business) Milk shakes needed to be produced To prepare the production budget we used the following assumptions: 10% of next months expected milk shake sales is desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. . January February March 1st Qtr total April PRODUCTION BUDGET - 1st QTR Large shakes (sales budget) + desired ending inventory Total needed Less: beginning inventory Large shakes to produce January February March 1st Qtr total April PRODUCTION BUDGET - 1st QTR Small shakes (sales budget) + desired ending inventory Total needed Less: beginning inventory Small shakes to produce After the number of milk shakes needed to be produced is determined, we can plan for the amount of direct materials, direct labor and manufacturing overhead that will be needed. A DIRECT MATERIALS budget will need to be produced for each ingredient used to make the milk shakes. The direct materials budget for whole milk was prepared using the following assumptions: 10% of next months expected milk needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of whole milk was determined to be $0.02344 per ounce . Milk Purchases Budget - 1" quarter Large Milk Shake Production Milk required per shake (ounces) Ounces Needed for Large Milk Shake Production Small Milk Shake Production Milk required per shake (ounces) Ounces needed for Small Milk Shake Production Total Ounces Required for Production Plus: Desired ending Inventory Total Ounces Available Less: Beginning Inventory Total Ounces to be purchased Cost per Ounce Total Cost of Milk to be purchased DIRECT MATERIALS BUDGET - CREAM. The direct materials budget for cream was prepared using the following assumptions: . 10% of next months expected cream needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of cream was determined to be $0.15625 per ounce Cream Purchases budget - 14 Quarter January February March Total April Large Milk Shake production 82,500 76,500 88,500 247,500 75,000 Cream required per shake(ounces) 3 ounces 3 ounces 3 ounces 3 ounces 3 ounces Ounces Needed for Large Milk Shake 247,500 229,500 265,500 742,500 225,000 Production Small Milk Shake Production 55,000 51,000 59,000 165,000 50,000 Cream required per sbake(ounces) 2 ounces 2 ounces 2 ounces 2 ounces 2 ounces Ounces Needed for Small Milk Shake 110,000 102,000 118,000 330,000 100,000 Production Total Ounces Required for Production 357,500 331,500 383,500 1,072,500 325,000 Plus: Desired Ending Inventory 33,150 38,350 32,500 32,500 32,500 Total Ounces Available 390,650 369,850 416,000 1,105,000 357,500 Less: Beginning Inventory -0- 33,150 38,350 -0- 32,500 Total Ounces to be purchased 390,650 336,700 377,650 1,105,000 325,000 Cost per Ounce $0.15625 $0.15625 $0.15625 $0.15625 $0.15625 Total Cost of Cream to be Purchased $61,039.06 $52,609.38 $59,007.81 $172,656.25 $50,781.25 DIRECT MATERIALS BUDGET - SUGAR. The direct materials budget for sugar was prepared using the following assumptions: 10% of next months expected sugar needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of sugar was determined to be $0.33333 per cup. 3/4 cup 3/4 cup 1/2 cup 1/2 cup Sugar Purchases Budget - 19 Quarter January February March Total April Large Milk Shake Production 82,500 76,500 88,500 247,500 75,000 Sugar required per shake (in cups) cup 3/4 cup 4 cup Cups Needed for Large Milk Shake 61,875 57,375 66,375 185,625 56,250 Production Small Milk Shake Production 55,000 51,000 59,000 165,000 50,000 Sugar required per sbake (in cups) 1/2 cup 22 cup 12 cup Cups Needed for Small Milk Shake 27,500 25,500 29,500 82,500 25,000 Production Total Cups Required for Production 89,375 82,875 95,875 268,125 81,250 Plus: Desired Ending Inventory 8,288 9,588 8,125 8,125 8,125 Total Cups Available 97,663 92,463 104,000 276,250 89,375 Less: Beginning Inventory -0- 8,288 9,588 -0- 8,125 Total Cups to be purchased 97,663 84,175 94,412 276,250 81,250 Cost per Cup $ 0.33333 $ 0.33333 $ 0.33333 $ 0.33333 $ 0.33333 Total Cost of Sugar to be Purchased $32,554.01 $28,058.05 $31,470.35 $92,082.41 $27,083.06 DIRECT MATERIALS BUDGET - ICE CREAM. The direct materials budget for ice cream was prepared using the following assumptions: 10% of next months expected ice cream needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of ice cream was determined to be $0.04 per ounce. Total 247,500 9 ounces 2,227,500 April 75,000 9 ounces 675,000 165,000 6 ounces 990,000 50,000 6 ounces 300,000 Ice Cream Purchases Budget - 14 Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Ice Cream Required per shake 9 ounces 9 ounces 9 ounces Ounces needed for Large Milk 742,500 688,500 796,500 Shake Production Small Milk Shake Production 55,000 51,000 59,000 Ice Cream Required per shake 6 ounces 6 ounces 6 ounces Ounces needed for Small Milk 330,000 306,000 354,000 Shake Production Total Ounces Required for 1,072,500 994,500 1,150,500 Production Plus: Desired Ending Inventory 99,450 115,050 97,500 Total Ounces Available 1,171,950 1,109,550 1,248,000 Less: Beginning -0- 99,450 115,050 Total Ounces to be purchased 1,171,950 1,010,100 1,132,950 Cost per ounce $ 0.04 $ 0.04 Total Cost of Ice Cream to be $46,878.00 $40,404.00 $45,318.00 Purchased 3,217,500 975,000 97,500 3,315,000 -0- 3,315,000 $ 0.04 $132,600.00 97,500 1,072,500 97,500 975,000 $ 0.04 $39,000.00 $ 0.04 DIRECT MATERIALS BUDGET - FLAVORINGS. The direct materials budget for flavorings was prepared using the following assumptions: . 10% of next months expected flavoring needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost of flavorings was $ 0.40 for a large shake and $ 0.25 for a small shake. . Flavorings Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Plus: Desired Ending Inventory 7,650 8,850 7,500 Total Available 90,150 85,350 96,000 Less: Beginning Inventory -0- 7,650 8,850 Total to be purchased 90,150 77,700 87,150 Cost per unit $ 0.40 $ 0.40 $ 0.40 Total Cost of Flavorings to be $36,060.00 $31,080.00 $34,860.00 Purchased for Large Milk Shakes Total 247,500 7,500 255,000 -0- 255,000 $ 0.40 $102,000.00 April 75,000 7,500 82,500 7,500 75,000 $ 0.40 $30,000.00 Small Milk Shake Production Plus: Desired Ending Inventory Total Available Less: Beginning Inventory Total to be Purchase Cost per unit Total Cost of Flavorings to be Purchased for Small Milk Shakes 55,000 5,100 60,100 -0- 60,100 $ 0.25 $15,025.00 51,000 5,900 56,900 5,100 51,800 $ 0.25 $12,950.00 59,000 5,000 64,000 5,900 58,100 $ 0.025 $14,525.00 165,000 50,000 5,000 5,000 170,000 55,000 -0- 5,000 170,000 50,000 $ 0.25 $ 0.25 $42,500.00 $12,500.00 $51,085.00 $44,030.00 $49,385.00 $144,500.00 $42,500.00 Total Cost of Flavorings to be Purchased for ALL Milk Shakes DIRECT MATERIALS BUDGET-STRAWS. The direct materials budget for straws was prepared using the following assumptions: 10% of next months expected straw needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost per straw is $ 0.75. . Straws Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Small milk shake Production 55,000 51,000 59,000 Total straws Required for Production 137,500 127,500 147,500 Plus: Desired Ending Inventory 12,750 14,750 12,500 Total Available 150,250 142,250 160,000 Less: Beginning Inventory -0- 12,750 14,750 Total Straws to be purchased 150,250 129,500 145,250 Cost per straw $ 0.75 $ 0.75 $ 0.75 Total cost of straws to be purchased $112,687.50 $97,125.00 $108,937.50 Total 247,500 165,000 412,500 12,500 425,000 -0- 425,000 $ 0.75 $318,750.00 April 75,000 50,000 125,000 12,500 137,500 12,500 125,000 $ 0.75 $93,750.00 DIRECT MATERIALS BUDGET-CUPS. The direct materials budget for cups was prepared using the following assumptions: 10% of next months expected cup needs are desired to be left in ending inventory as a safety cushion. Remember, beginning inventory is last months ending inventory. Cost per cup is $ 0.50 for a large shake and $ 0.40 for a small shake. . Cups Purchases Budget - 1st Quarter January February March Large Milk Shake Production 82,500 76,500 88,500 Plus: Desired Ending Inventory 7,650 8,850 7,500 Total Available 90,150 85,350 96,000 Less: Beginning Inventory -0- 7,650 8,850 Total cups to be Purchased 90,150 77,700 87,150 Cost per Cup $ 0.50 $ 0.50 $ 0.50 Total Cost of Cups to be purchased $45,075.00 $38,850.00 $43,575.00 Total 247,500 7,500 255,000 -0- 255,000 $ 0.50 $127,500.00 April 75,000 7,500 82,500 7,500 75,000 $ 0.50 $37,500.00 Cups Purchases Budget - 14 Quarter January February March Small Milk Shake Production 55,000 51,000 59,000 Plus: Desired Ending Inventory 5,100 5,900 5,000 Total Available 60,100 56,900 64,000 Less: Beginning Inventory -0- 5,100 5,900 Total cups to be Purchased 60,100 51,800 58,100 Cost per Cup $ 0.40 $ 0.40 $ 0.40 Total Cost of Cups to be purchased $24,040.00 $20,720.00 $23,240.00 Total 165,000 5,000 170,000 -0- 170,000 $ 0.40 $68,000.00 April 50,000 5,000 55,000 5,000 50,000 $ 0.40 $20,000.00 MANUFACTURING OVERHEAD BUDGET First, we need to determine whether each manufacturing overhead expense is variable or fixed. It has been determined that all the manufacturing overhead costs are fixed, although salary of part-time workers and utilities can be variable or mixed expenses as well. March Total Manufacturing Overhead Budget - 1Quarter January February Fixed manufacturing overhead costs: Salary of 2 part-time workers Rent and utilities expense Supplies for making milk shakes Depreciation - milk shake maker Depreciation - refrigerator/freezer Depreciation - counter tops TOTAL FIXED COSTS OPERATING BUDGET First we need to determine whether each operating budget expense is variable or fixed. It has been determined that all the operating costs are fixed. March Total Operating Budget - 14 Quarter January February Fixed operating expenses: Depreciation - tables and benches Insurance expense Interest expense Advertising expense Accounting and bookkeeping expense Owner's salary expense Dues and membership expense Licenses and Permits expense Maintenance expense Office supplies expense Depreciation - sign TOTAL FIXED COSTS So what is the BUDGETED MANUFACTURING COST FOR ONE UNIT: Direct Materials Variable Costs per unit: Ingredient Cost Whole milk $15 for 640 oz. Cream $20 for 128 oz. Sugar $10 for 30 cups Premium Vanilla Ice Cream $24 for 600 oz. Flavorings Flavored Specialty Straws Cups-8 ounces $200 for 500 cups Cups-12 ounces $250 for 500 cups TOTAL DIRECT MATERIAL COST PER UNIT 0.02344 per oz. 0.15625 per oz. 0.33333 per cup 0.04000 per oz. Small Large 0.05 0.07 0.31 0.47 0.17 0.25 0.24 0.36 0.25 0.40 0.75 0.75 0.40 0.40000 0.50000 per cup per cup 0.50 $2.17 $2.80 LARGE MILK SHAKES per the PRODUCTION budget we expect to produce 1,580,000 in the first Year: (125,000+125,000+150,000+125,000+125,000+150,000+160,000+150,000+110,000+110,000 +110,000+140,000) (1) Direct materials cost per milk shake: 2.80 (2) Manufacturing overhead: Fixed ($2,234.00 *12months * 60% per quarter)/ 1,580,000 = milk shakes 0.01 Cost of manufacturing each large milk shake $2.81 SMALL MILK SHAKES per the PRODUCTION budget we expect to produce 165,000 in the first quarter. (1) Direct materials cost per milk shake: 2.17 (2) Manufacturing overhead: Fixed ($2,234.00 * 12 months * 40% per quarter)/ 1,580,000 = milk shakes 0.01 $2.18 Cost of manufacturing each small milk shake PROJECTED INCOME STATEMENT - MONTH OF JANAURY Large (60%) Small (40%) Number of milk shakes expected to be sold 75,000 50,000 Sales price per milk shake (less resort fee) $9.00 $6.30 Cost of goods sold per milk shake $2.81 $2.18 Total 125,000 Sales Less: cost of goods sold Gross Profit Less: Operating expenses Operating Income Income tax expense (income tax rate = 35%) Net Income
