Gidgetry Technologies (GT) produces technologies for the North American consumer retail market. Over the past three years GT has sold an average of 167,000 units annually. Average Quarterly Units Sales (Past Three-Years) Q1 Q2 Q3 Q4 35,000 32,000 45,000 55,000 Last year, Gidgetry had its best sales to date, 187,000 units, and management expects sales to grow by 30% in the coming year. To support this sales-growth you have been asked to produce a cash budget for the upcoming fiscal year.

The budget needs to provide management with seasonally adjusted-quarterly unit sales, as well as, quarterly sales revenues, assuming an average unit sales price of $100.

The budget should assume an ending finished goods inventory holding policy of 10% of the next quarters demand. Quarter 1, opening inventory, should be assumed to be 4,904 units, and the following years first quarter inventory should be assumed to be 10% of 50,000 units of demand. While management was disappointed with an average rejection rate of 5% of all unit production, they have for now accepted this as a reality for the upcoming year.

Each Gidget Tech is made using 8 lbs of premium direct materials, costing $5 per lb.. Direct materials wastage in the production process is high at 25% of direct materials. For this reason, direct materials inventory policy requires a very high level of direct materials. In fact, 15% of direct materials required for the following quarter must be kept on hand. Management has asked that opening and closing direct materials inventory for the year be held at 50,000 lbs.

GTs labour costs are high given the requirement for highly skilled workers. GT currently employs 100 employees that are paid $50,000 annually. Each employee is required to work 450 hours per quarter. Direct labour time over 450 hours per quarter is paid at a rate of $35 per hour. Each unit of production requires .75 direct labour hours.

Machines used in GTs production processes are leased at a cost of $25,000 per machine. Each machine has a capacity of 2,000 hours and each GT unit requires .75 machine hours.

Other quarterly fixed costs of production are as follows:

Other Annual Fixed CostsHuman Resources$400,000Information Technology$100,000Distribution$480,000Marketing$300,000

The Tasks at Hand

Create a cash budget for GTs upcoming fiscal year (assume an income tax rate of 27%).

Management has also asked that you report back on the following financial measures. In your memo, provide an overview of how these measures can be useful in aiding management to lead and financially manage the organization.

Break-Even Quantity

Break-Even Sales

Margin of Safety (based on budgeted sales for the year)

Using the ideas of total quality management (TQM), and your cash budget, provide a review of what costs can be managed better in the coming year. Provide specific ideas on how costs could be better managed in the coming year. Be sure to review both the benefits and risks of your cost management ideas.