** I updated to remove over half the problem*** Read the case and analyze the information. Prepare an operating budget in standard "income statement" format. Prepare a narrative report (or notes to the income statement) addressing why/how quantitative items were selected. The following items must be explained: 1. Sales Forecast 2. Purchases budget (raw materials, labor, all resources) 3. Operating Expenses Harvey's Budget 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. Harvey's general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget prepared for each quarter of 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 in units and selling price (SP) in dollars per unit Historical sales for 2012 for each of the two products are shown below. Product Sales for 2012 Screwdriver Units Saws SP Units SP January Fe brua March April May June July August 98 98 98 19,000100 Harvey's sales typically peak in the summer months, beginning with May. Harvey's 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. Lipscomb's recommendation is that annual sales be budgeted at 64,000 units per month for screwdrivers and 42,000 units 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. The company applies variable overhead on the basis of direct labor hours. Standard costs per unit Screwdrivers Saws Unit cost Cost Direct materials Units Unit costCost Units 5 lbs 3 lbs unit 8.00 40. 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 in the following quarter. Inventories First Quarter Beginning Ending Screwdrivers, finished Saws, finished Metal Plastic Handles 20,000 25,000 8,000 10 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: FOR THE FIRST QUARTER OF 2013: 1. Prepare a sales budget in good form. 2. Prepare a narrative report explaining how your sales budget was determined. Use the table above in your analysis. (Hint: Many companies would develop their budgets using average sales and average unit costs.) Whatever budget determination method you use should be explained. In your explanation, you should include a discussion of why you believe sales and selling prices fluctuated last year. 3. Prepare a production budget in units.