Chapter 20 Master Budgets and Planning Management expects December's results to be repeated in January, February, and March without any changes in strategy. Management, however, has an alternative plan. It believes that if the unit selling price is reduced to $125 per unit and advertising is increased to $287,500 per month, sales units will be 16,500 for January, 18,150 for February, and 19,965 for March. The cost of its product will remain at $75 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same. Required 1. Prepare budgeted income statements for each of the months of January, February, and March that show results from implementing the proposed plan. Use a three-column format, with one column for each month. Ignore income taxes. Analysis Component 2. For the proposed plan, is income in March budgeted to be higher than income in December? 809 The management of Zigby Manufacturing prepared the following balance sheet for March 31. ZIGBY MANUFACTURING Balance Sheet March 31 Problem 20-4A Manufacturing: Preparation of a complete master budget P1 P2 P3 Assets Liabilities and Equity Cash... $ 40,000 Liabilities Accounts receivable. 344,400 Accounts payable... $201,000 Raw materials inventory.. 98,500 Loan payable.. 12,000 Finished goods inventory. 325,540 Long-term note payable.. 500,000 $713.000 Equipment...... Less: Accumulated depreciation... $600,000 150,000 Equity 450,000 Common stock.... Retained earnings 335,000 210,440 Total assets $1,258,440 Total liabilities and equity.... 545,440 $1,258,440 To prepare a master budget for April, May, and June, management gathers the following information. a. Sales for March total 20,500 units. Budgeted sales in units follow: April, 20,500; May, 19,500; June, 20,000; and July, 20,500. The product's selling price is $24.00 per unit and its total product cost is $19.85 per unit. b. Raw materials inventory consists solely of direct materials that cost $20 per pound. Company policy calls for a given month's ending materials inventory to equal 50% of the next month's direct materials requirements. The March 31 raw materials inventory is 4,925 pounds. The budgeted June 30 ending raw materials inventory is 4,000 pounds. Each finished unit requires 0.50 pound of direct materials. c. Company policy calls for a given month's ending finished goods inventory to equal 80% of the next month's budgeted unit sales. The March 31 finished goods inventory is 16,400 units. d. Each finished unit requires 0.50 hour of direct labor at a rate of $15 per hour. e. The predetermined variable overhead rate is $2.70 per direct labor hour. Depreciation of $20,000 per month is the only fixed factory overhead item. f. Sales commissions of 8% of sales are paid in the month of the sales. The sales manager's monthly sal- ary is $3,000. g. Monthly general and administrative expenses include $12,000 for administrative salaries and 0.9% monthly interest on the long-term note payable. h. The company budgets 30% of sales to be for cash and the remaining 70% on credit. Credit sales are collected in full in the month following the sale (no credit sales are collected in the month of sale).