Data:

Don expects that these costs are reliable estimates for a volume up to 400,000 units. Beyond 400,000 units, the company would have to rent additional machines (with a capacity of 100,000 units each) at an annual cost of $50,000 per machine (in 2016). The data are presented in Exhibit A. Total fixed manufacturing and selling and administrative costs are each expected to increase in 2017 by 10 percent because of inflation. Variable costs per unit and the selling price would stay the same as in 2016.

Plan A:

Cut price At the present time we price the product to retailers at $8.00 per rattle. Retailers generally charge the consumers between $9.00 and $9.50. If we cut our price to retailers to $7.50, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers. We should support this strategy by supplying more promotional materials to retailers, at least another $200 worth to each of our 23 retailers. I expect that we will be able to boost our sales volume by as much as 30 percent.

This case uses the data provided above. Assume that the company decided to follow Plan A for 2017. The CFO, Don Capp was assembling data in November 2016 to prepare a budget for 2017.

20 percent of the sales in the first quarter

30 percent in each of the next two quarters

20 percent in the last quarter.

It was hard to figure out the sales by month -- the best assumption was that sales would be spread out evenly by month within each quarter.

The promotional materials would be supplied to retailers in January.

The production department planned to maintain as the finished goods inventory enough inventory for the following months sales. However, the December 2016 finished goods inventory was expected to be only 20,000 rattles, and the December 2017 finished goods inventory was planned to be equal to December 2017s sales (since January 2018 expected sales was not yet known).

Don Capp also knew that several of the company's policies would continue into the next year:

a. Child's Play generally sells to retailers on two month's credit. The beginning balance in accounts receivable at the start of the year was expected to be $400,000, of which half would be collected in January 2017, and the remainder in February.

b. Raw materials and packaging materials are purchased one month ahead of their use. The company makes the purchase on one month's credit.

c. All costs (other than materials) are paid for as incurred.

d. The fixed manufacturing costs include $80,000 of depreciation expense. Fixed selling and administrative costs include $40,000 of depreciation. The rest of the costs relate to rental costs, property taxes and salaries and are paid monthly.

e. The company generally maintains a cash balance of about $10,000. If the balance drops below that amount, the company will take a short term loan from the bank. (Ignore interest.)

Required:

Prepare a cash budget for each month for the first quarter of 2017. Ignore income taxes.

Calculation of Fixed Costs @ 300,000 units Total Fixed Cost $ 990,000 Add Inflation: 10% increase $ 99,000 Total Fixed Cost $ 1,089,000 Variable Cost Particulars Direct Material Direct Labor ($10 per hour, each worker can make 20 units in an hour) Packaging Power, Supplies, indirect labor, & other variable production costs Commissions to sales staff (10% of retail) Shipping Total Variable Cost $ $ $ $ $ $ $ 0.80 per unit 0.50 per hour 0.75 per unit 1.20 per unit 0.80 per unit 0.50 per unit 4.55 per unit 8.00 Contribution Margin per unit Sale Price per unit $ Less: Total Variable Cost per $ Contribution per unit $ 4.55 3.45 Fixed Cost Particulars Administrative staff salaries, depreciation on office equipment Supervisory salaries, equipment rental, and misc production costs Advertising & promotion Total Fixed Cost $ $ $ $ 0.90 per unit 1.80 per unit 0.60 per unit 3.30 per unit Contribution Margin % Sale Price per unit $ Contribution per unit $ Contribution Margin % 8.00 3.45 43.13%