Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash	$	46,200
Accounts receivable (net)		260,000
Raw materials inventory (4,500 yards)		11,250
Finished goods inventory (1,500 units)		32,250
Total current assets				$	349,700
Plant and equipment:
Buildings and equipment		900,000
Accumulated depreciation		(292,000	)
Plant and equipment, net					608,000
Total assets				$	957,700
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable				$	158,000
Stockholders equity:
Common stock	$	419,800
Retained earnings		379,900
Total stockholders equity					799,700
Total liabilities and stockholders equity				$	957,700

The companys chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarters ending finished goods inventory should equal 15% of the next quarters unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarters ending raw materials inventory should equal 10% of the next quarters production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarters purchases are paid for in the quarter of purchase. The remaining 30% of each quarters purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The companys lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the first-out to production and the most recently completed finished goods are the first-out to customers.

Required:

1. To help assess the companys liquidity, calculate the following at December 31, 2017:

a. Working capital

b. Current ratio

2. To help assess the companys asset management, calculate the following for 2017:

a. Accounts receivable turnover

b. Average collection period

c. Inventory turnover

d. Average sale period

e. Operating cycle

3. To help assess the companys debt management, calculate the following for 2017:

a. Times interest earned ratio

b. Equity multiplier

4. To help assess the companys profitability, calculate the following for 2017:

a. Net profit margin percentage

b. Return on equity

5. For each of the measures and ratios that you computed in requirements 1 through 4, indicate whether, generally speaking, management would prefer to see it increase or decrease over time.

Endless Mountain Company Cash Budget For the Year Ended December 31, 2017 Quarter Year $ 46,200 30,000 $ 244,649 314,338$ 46,200 Beginning cash balance Add cash receipts Collection from customers Total cash available Less cash disbursements 548,000 984,000 1,014,000 656,000 720,000 2,908,000 594,200 900,649 1,034,338 2,954,200 Direct materials Direct labor Manufacturing overhead Selling and administrative Dividends 291,287 72,225 142,039 124,000 15,000 644,551 (50,351) 292,176 151,650 155,275 155,250 15,000 769,351 244,649 226,937 74,250 142,375 127,750 15,000 586,312 314,337 218,0541,028,453 402,525 587,089 547,250 60,000 625,1042,625,317 328,883 104,400 147,400 140,250 15,000 Total cash disbursements Excess or (deficiency) of cash available over disbursements Financing 409,234 Borrowings (at the beginnings of quarters) Repayment (at end of the year) Interest (at 3% per quarter) 80,350 (80,350) (9,642) (9,642) $29,999 S 244,649$ 314,337 $ 319,242$ 319,241 80,350 0 (80,350) (9,642) (89,992) Total financing Ending cash balance 80,350 Endless Mountain Company Selling and Administrative Expense Budget For the Year Ended December 31, 2017 Quarter 2 4 Year 15,000 Budgeted unit sales Variable selling and administrative expense per unit Sales Fixed selling and administrative expenses 12,000 37,000 89,000 1.25 31,25011,250 25,000 1.25$ 1.25 $ 1.25$ 1.25$ $ 15,000$46,250$ 18,750 25,000 64,000 12,000 8,000 8,000 117,000 135,750 8,000 Cash disbursements for selling and administrative expenses S 124,000$155,250 S 127,750 Advertising Executive salaries Insurance Property taxes Depreciation 25,000 64,000 12,000 8,000 8,000 117,000 132,000 8,000 25,000 64,000 12,000 8,000 8,000 117,000 163,250 8,000 100,000 256,000 48,000 32,000 32,000 468,000 579,250 32,000 140,250$ 547,250 25,000 64,000 12,000 8,000 8,000 117,000 148,250 8,000 Total fixed selling and administrative expenses Total selling and administrative expenses Less depreciation Endless Mountain Company Ending Finished Goods Inventory Budget (absorption costing basis) For the Year Ended December 31, 2017 Quantity Item Cost Total Production cost per unit Direct materials Direct labor Manufacturing overhead Unit product cost 3.50 yards 0.25 hours 0.25 hours $ 3.00 per yard $ 18.00 per hour $ 29.83 per hour 10.50 4.50 7.46 22.46 Budgeted finished goods inventory: Units from prior year's production Unit product cost Cost from prior year's production 1,500 21.50 $32,250 Units from current year's production Unit product cost Cost from current year's production 450 22.46 10,107 Cost of ending finished goods inventory 42,357 Endless Mountain Company Manufacturing Overhead Budget For the Year Ended December 31, 2017 Quarter 2 3 4 Year 4,012.5 8,425.0 4,125.0 5,800.0 Budgeted direct labor hours Variable manufacturing overhead per direct labor-hour$ Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead Less depreciation Cash disbursements for manufacturing overhead 22,362.5 3 17,400 $ 67,088 600,000 667,088 80,000 587,088 12,038 $ 25,275$ 12,375$ 150,000 162,038 20,000 142,038 150,000 175,275 20,000 155,275 150,000 162,375 20,000 142,375 150,000 167,400 20,000 147,400 Total manufacturing overhead Budgeted direct labor hours Predetermined overhead rate for the vear $667,088 22,362.5 29.83 Endless Mountain Company Direct Labor Budget For the Year Ended December 31, 2017 Quarter 2 3 4 Year Required production in units Direct labor-hours per unit Total direct labor-hours needed Direct labor cost per hour Total direct labor cost 16,050 0.25 4,012.5 33,700 0.25 8,425.0 16,500 0.25 4,125.0 89,450 0.25 22,362.5 18 104,400 $ 402,525 23,200 0.25 5,800.0 18 $ 72,225 $ 151,650 S 18 $ 18 S 18 $ 74,250 Endless Mountain Company Direct Materials Budget For the Year Ended December 31, 2017 Quarter Year Required production in units Quantity of raw materials needed per unit Quantity of raw materials needed to meet production Add desired quantity of ending raw materials inventory Total quantity of raw materials needed Less quantity of beginning raw materials inventory Quantity of raw materials to be purchased Cost of raw materials per yard Cost of raw materials to be purchased 16,050 3.5 56,175 11,795 67,970 4,500 63,470 33,700 3.5 117,950 5,775 123,725 11,795 111,930 16,500 3.5 57,750 8,120 65,870 5,775 60,095 23,200 3.5 81,200 5,000 86,200 8,120 78,080 89,450 3.5 313,075 5,000 318,075 4,500 313,575 $190,410 $ 335,790$180,285 234,240$940,725 Schedule of Expected Cash Disbursements for Purchases of Materials 158,000 190,410 335,790 180,286 163,968 $ 291,287 292,176 226,937$ 218,054 1,028,454 $ 158,000S Beginning accounts payable First-quarter purchases Second-quarter purchases Third-quarter purchases Fourth-quarter purchases Total cash disbursements for materials 133,287 57,123 0 100,737 126,200 235,053 54,086 163,968 Prepare the quarterly production budget Endless Mountain Company Production Budget For the Year Ended December 31, 2017 Quarter 2 4 Year 37,000 2,250 39,250 5,550 33,700 Budgeted unit sales Add desired units of ending finished goods 12,000 5,550 17,550 1,500 16,050 15,000 3,750 18,750 2,250 16,500 25,000 1,950 26,950 3,750 23,200 89,000 1,950 90,950 1,500 89,450 invento Total needs Less units of beginning finished goods inventory Required production in units Endless Mountain Company Sales Budget For the Year Ended December 31, 2017 Quarter 3 Year 12,000 37,000 Budgeted unit sales Selling price per unit Sales 15,000 25,000 89,000 32 2,848,000 32 % 32 $ 32/ $ 32 S $ 384,000$ 1,184,000$ 480,000$ 800,000 Schedule of Expected Cash Collections $ 260,000$ Beginning accounts receivable First-quarter sales Second-quarter sales Third-quarter sales Fourth-quarter sales Total cash collections 0 S 260,000 384,000 1,184,000 480,000 600,000 $ 548,000$ 984,000$ 656,000$ 720,000$ 2,908,000 288,000 96,000 0 296,000 360,000 0 0 888,000 120,000 600,000 0 0 Endless Mountain Company Budgeted Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory $319,243 200,000 12,750 42,356 Total current assets $574,349 Plant and equipment Buildings and equipment Accumulated depreciation 900,000 (404,000) Plant and equipment, net 496,000 Total assets $ 1,070,349 Liabilities and Stockholders' Equity Current liabilities: 70,272 Accounts payable Stockholders' equity: 419,800 580,277 Common stock, no par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 1,000,077 $ 1,070,349 Endless Mountain Company Budgeted Income Statement For the Year Ended December 31, 2017 (Absorption costing basis) Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Interest expense Net income $ 2,848,000 1,998,732 849,268 579,250 270,018 9,642 $260,376