Harvey Manufacturing manufactures and sells two industrial products: a self-balancing screw driver and a self-balancing saw. Both products are manufactured in a single plant.

Harveys general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget prepared for the fiscal year 2013. They have asked various employees to gather information that they believe will be necessary for preparation of a budget. The information is presented below.

Neither Mr. Lipscomb nor Mr. Owens is skilled in budget preparation. Both executives have used budgets and have participated to some degree in budget preparation in prior years, but neither has prepared a full budget

Sales and selling price per unit

Historical sales for 2012 the two products are shown below.

	Product sales for 2012
	Screwdriver			Saws
	Units	SP		Units	SP
January	52,000	98		42,000	118
February	53,000	98		42,000	120
March	55,000	98		40,000	122
April	60,000	100		41,000	125
May	64,000	100		42,000	125
June	64,000	102		42,000	130
July	64,000	102		40,000	130
August	63,000	102		39,000	130
September	61,000	100		40,000	125
October	60,000	100		37,000	125
November	65,000	100		38,000	125
December	59,000	100		39,000	125

Harveys sales typically peak in the summer months, beginning with May. Harveys general manager, Mr. Lipscomb, recommends that the budget be prepared with the units sold in the high sales months of May, June, and July be used as the bases for determining the annual forecast. Mr. Lipscombs recommendation is that annual sales be budgeted at 64,000 per month for screwdrivers and 42,000 per month for saws.

Mr. Lipscomb also believes that the budgeted selling price per unit should be equal to the highest selling price that could be achieved in 2012. He would like to budget 102 per unit for screwdrivers and 130 per unit for saws. Mr. Lipscomb states that his management team experimented with pricing in the prior year, beginning with the first month of the year.

You review the unit sales and unit selling price information for 2012 and recommend a budget based on 60,000 units of screwdrivers at 100 each and 40,000 units of saws at 125 each. Mr. Lipscomb challenges your conclusion. Likewise Mr. Owens, the company president, would like to hear an explanation of the budget numbers and how or why you calculated those numbers.

Production Requirements

Each unit produced requires the following materials, labor, and overhead, all of which is variable.

Standard costs per unit
			Screwdrivers					Saws
Direct Materials			Units		Unit Cost	Cost		Units		Unit cost	Cost
	Metal		5	lbs	8.00	40.00		4	lbs	8.00	32.00
	Plastic		3	lbs	5.00	15.00		3	lbs	5.00	15.00
	Handles		1	unit	3.00	3.00
						58.00					47.00
Direct Labor			2	hrs	12.00	24.00		3	hrs	16.00	48.00
Variable manufacturing OH			2	hrs	1.50	3.00		3	hrs	1.50	4.50
Total						85.00					99.50

Inventories

Inventories are listed below. The beginning inventories are the actual amounts on hand at the beginning of the year. The ending inventories shown are the amounts that the operations manager has determined to be necessary to ensure smooth production processes.

Inventories
	Beginning		Ending
Screwdrivers, finished	20,000		25,000
Saw finished	8,000		10,000
Metal	320,000		36,000
Plastic	29,000		32,000
Handles	6,000		7,000

Other information

Fixed manufacturing overhead

Fixed manufacturing overhead is 214,000, including 156,000 of non-cash expenditures.

Fixed manufacturing overhead is allocated on total units produced.

Beginning cash is 1,800,000.

Sales are on credit. Sales are collected 50 percent in the current period and the remainder in the next period. There are no bad debts.

Sales for the last quarter were 8,400,000.

Purchases for direct materials and labor costs are paid for in the quarter acquired.

Manufacturing overhead expenses are paid in the quarter incurred.

Selling and administrative expenses are all fixed and are paid in the quarter incurred.

Estimated selling and administrative expenses for the next period are 340,000 per quarter, including 90,000 of depreciation.

REQUIREMENTS:

3. Prepare a production budget in units.

4. Prepare a purchases budget. Remember that you will need to purchase enough materials to have the required ending inventories shown. You will also need to purchase enough to manufacture and sell the products on your sales forecast. Do not forget that you have beginning inventories.

5. Prepare a narrative report explaining how you prepared the purchases budget. Be as detailed as necessary to be sure that the president and general manager will understand the calculations and costs.