EYK9-1. Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the

following sales forecast for the months of January through March 2016 for its only two products:

50,000 units of J to be sold at $90 each and 30,000 units of K to be sold at $70 each. The desired

unit inventories at March 31, 2016, are 10% of the next quarters unit sales forecast, which are

60,000 units of J and 30,000 units of K. The January 1, 2016, unit inventories were 5,000 units of

J and 2,000 units of K.

Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K

requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase

cost of B is $5 per pound. Materials A and B on hand at January 1, 2016, were 19,000 pounds of A

and 7,000 pounds of B. Desired inventories at March 31, 2016, are 14,000 pounds of A and 8,000

pounds of B.

Each unit of J requires 0.5 hour of direct labor in the factory; each unit of K requires 1.0 hour

of direct labor. The average hourly rate for direct labor is $12 per hour. Estimated manufacturing

overhead cost is $6 per direct labor hour plus $90,000 per month. Selling and administrative expenses

are estimated to be 10% of sales revenue plus $180,000 per month.

Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30%

of the credit sales for the quarter ended March 31, 2016, will occur in January, 30% in February,

and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the

month of sale and 55% will be collected in the following month. The remainder will be uncollectible.

Cash collected in January 2016 from December 2015 sales will be $1,050,000.

The January 1, 2016, cash balance was $70,000. The minimum acceptable cash balance at

the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of

$10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest

payment is made the month following the borrowing. Cash disbursements (excluding interest on

short-term borrowings) are estimated as follows:

January February March

Manufacturing costs....................$1,500,000 $1,300,000 $1,400,000

Selling and administrative expenses .......390,000 410,000 400,000

Interest expense.......................90,000 90,000 90,000

Income tax payment....................0 0 210,000

Capital expenditures ...................124,000 110,000 50,000

Cash dividends........................300,000 0 0

Required

Donovan Manufacturing, Inc. Sales Budget For the Quarter Ended March 31, 20X1 Forecast Unit Sales Planned Unit Sales Volume Price Budgeted Total Sales Product K Total sales revenue b. Donovan Manufacturing, Inc. Production Budget For the Quarter Ended March 31, 20x1 Units of Finished Product K Forecast unit sales Desired ending Quantities to be available Less: Beginning inventories Total production to be scheduled C. Donovan Manufacturing, Inc. Direct Material Budget For the Quarter Ended March 31, 20x1 Material Material A B Direct material required: Products: Product K: Desired ending materials inventories Total pounds of material to be available Less: Beginning materials inventories Total pounds of material to be purchased Unit purchase price Total material purchases d. Donovan Manufacturing, Inc. Direct labor Budget For the Quarter Ended March 31, 20X1 Direct labor hours required for production: Product : Product K: Total direct labor hours Hourly rate for direct labor Total direct labor cost e Donovan Manufacturing, Inc. Manufacturing Overhead Budget For the Quarter Ended March 31, 20x1 Total direct labor hours Variable manufacturing overhead rate Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost f. Donovan Manufacturing, Inc. Selling and Administrative Budget For the Quarter Ended March 31, 20x1 Total sales revenue Variable selling and administrative rate Variable selling and administrative expenses Fixed selling and administrative expenses Total selling and administrative expenses Donovan Manufacturing, Inc. Schedule of Cash Collections For the Quarter Ended March 31, 20x1 January February March Cash sales: Credit sales: December January February: March: Total credit sales Total sales h. Donovan Manufacturing, Inc. Cash Budget For the Quarter Ended March 31, 20X1 January February March Beginning cash balance Cash receipts: Cash sales Collections from customers Short-term borrowing Cash available Cash disbursements: Manufacturing costs Selling and administrative expenses Interest expense Income tax payments Capital expenditures Cash dividends Total disbursements Ending cash balance