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Draft a budgeted income statement using absorption costing and a budgeted balance sheet as of December 31, 2020

Explore Scientific Inc. is a company that manufactures and sells a single product, which they call LX200. For planning and control purposes they utilize a monthly master budget, which is usually developed at least six months in advance of the budget year. Their fiscal year end is December 31. Their sales forecast consisted of these few lines: For the year ended December 31, 2019: 450,000 units at $11.00 each* For the year ended December 31, 2020: 600,000 units at $11.00 each For the year ended December 31, 2021: 800,000 units at $12.00 each *Expected sales for the year ended December 31, 2019 are based on actual sales to date and budgeted sales for the duration of the year. 1. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of total sales for each month. Sales pick up over the summer with July, August and September each contributing 2% of the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10% of total sales. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next three years. 2. From previous experience, management has determined that an ending inventory equal to 25% of the next months sales is required to fit the buyers demands. 3. Because sales are seasonal, Explore Scientific must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $25,000 per month, payable at the beginning of the month. 4. There is only one type of raw material used in the production of LX200s. Plactics is a very compact material that is purchased in powder form. Each LX200 requires 5 kilograms of PLATIC, at a cost of $0.70 per kilogram. This represents a recent increase of $0.05 per kilogramwhich the distributor explained was a result of anticipated oil shortages in the coming year. PLATIC is an oil-based product. The price change was effective July 1, 2019 when Explore Scientific signed a three-year fixed price contract with the supplier. 5. The supplier of PLATIC tends to be somewhat erratic so Explore Scientific finds it necessary to maintain an inventory balance equal to 40% of the following months production needs as a precaution against stock-outs. Explore Scientific pays for 20% of a months purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.

2 6. Beginning accounts payable will consist of $364,309 arising from the following estimated direct material purchases for November and December of 2019: PLATIC purchases in November 2019: $396,825 PLATIC purchases in December 2019 $281,775 7. Explore Scientifics manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $12.00 per hour. This rate already includes the employers portion of employee benefits. All payroll costs are paid in the period in which they are incurred. Each unit spends a total of 12 minutes in production. 8. Due to the similarity of the equipment in each of the production stages and the companys concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance--$0.30; environmental fee-$0.14; and Other--$0.06. 9. The fixed manufacturing overhead costs for the entire year are as follows: Training and development $ 43,200 Business taxes 39,000 Supervisors salary 149,400 Amortization on equipment 178,800 Insurance 96,000 Other 117,600 $ 624,000 Although the annual business taxes are paid on June 30 of each year, they are expensed on a monthly basis. The expected payment for next year is $39,600. The annual insurance premium is paid at the beginning of September each year. There should be no change in the premium from last year. All other cash-related fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred. Explore Scientific uses the straight-line method of amortization. 10. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous years experience has provided the following information: Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460 These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense.

3 11. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. of 1% of sales are considered uncollectible (bad debt expense). 12. Sales in November and December 2019 are expected to be $990,000 and $1,980,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $975,150 at December 31, 2019 which will be collected in January and February, 2020. 13. During the fiscal year ended December 31, 2020, Explore Scientific will be required to make monthly income tax installment payments of $1,000. Outstanding income taxes from the year ended December 31, 2019 must be paid in April 2020. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2020, in excess of installment payments, will be paid in April, 2021. 14. Explore Scientific is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2020, the rest, in December 2020. The manufacturing overhead costs shown above already include the amortization on this equipment. 15. An arrangement has been made with the local bank that if Explore Scientific maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month. 16. Explore Scientific Inc. has a policy of paying dividends at the end of each quarter. The president tells you that the board of directors is planning on continuing their policy of declaring dividends of $50,000 per quarter. 17. A listing of the estimated balances in the companys ledger accounts as of December 31, 2019 is given below: Assets Cash $ 83,365 Accounts receivable 975,150 Inventory-raw materials 15,600 Inventory-finished goods 10,950 Prepaid Insurance 64,000 Prepaid property and business taxes 19,200 Capital assets (net) 724,000 Total assets $1,892,265

4 Liabilities and Shareholders Equity Accounts payable $ 364,309 Income taxes payable 21,500 Capital stock 1,200,000 Retained Earnings 306,456 Total liabilities and shareholders equity $1,892,265 Required: 1. Based on the information provided, prepare a monthly master budget for Explore Scientific for the year ended December 31, 2020, including the following schedules: Sales Budget & Schedule of Cash Receipts Production Budget Direct Materials Budget & Schedule of Cash Disbursements Direct Labour Budget Manufacturing Overhead Budget Ending Finished Goods Inventory Budget Selling and Administrative Expense Budget Cash Budget 2. Draft a budgeted income statement using absorption costing and a budgeted balance sheet as at December 31, 2020. 3. Calculate the break-even in units and in dollars.