home / study / business / accounting / accounting questions and answers / harvey manufacturing manufactures and sells two industrial products: a self-balancing screw ... Question: Harvey Manufacturing manufactures and sells two industrial products: a self-balancing screw drive... 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: 6. Prepare a budgeted income statement. 7. Prepare a contribution margin income statement. 8. Prepare a narrative report explaining how the expenses on the income statement were determined.