Jay Rexford, president of Frame-it Company, was just concluding a budget meeting with his senior staff. It was November of 20x2, and the group was discussing preparation of the firm's master budget for 20x3. "I've decided to go ahead and purchase the industrial robot we've been talking about. We'll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment."

In response to a question about financing the acquisition, Rexford replied as follows: "The robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be purchased. We'll finance these purchases with a one-year $1,000,000 loan from Arlong Bank and Trust Company. I've negotiated a repayment schedule of four equal instalments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well." With that the meeting broke up, and the budget process was on.

Frame-it Company is a manufacturer of metal picture frames. The firm's two product lines are designated as S (small frames; 50 X 70 cm) and L (large frames; 80 X 100 cm). The primary raw materials are flexible metal strips and 90cm by 240cm glass sheets. Each S frame requires a 2-metre metal strip; an L frame requires a 3-metre strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Frame-it's controller, is in charge of preparing the master budget for 20x3. She has gathered the following information:

1. Sales in the fourth quarter of 20x2 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x3 are expected to be 55,000 units.

2. Frame-it's sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company's collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the following quarter. (For simplicity, assume the company is able to collect 100 percent of its accounts receivable.)

3. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x3.

4. For the S frames, the production manager attempts to end each quarter with enough finished-goods inventory to cover 20 percent of the following quarter's sales. For the L frames, only 10 percent of the following quarters sales is required in ending inventory. Additionally, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarter's production. Since metal strips are purchased locally, the company buys them on a just-in-time basis; inventory is negligible.

5. All direct-material purchases are made on account, and 80 percent of each quarter's purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.

6. Indirect materials are purchased with cash as needed. Work-in-process is negligible.

8. Direct labour costs are paid for in cash in the quarter they are incurred.

10. Frame-it's quarterly selling and administrative expenses are $100,000, paid in cash.

11. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

13. Frame-it Company is subject to 30% income tax

REQUIRED:

Prepare Frame-it Companys 20X3 master budget, which should include the following, in quarters and for the whole year:

1. Sales budget

2. Production budget

3. Direct materials budget (metal strips and glass sheets)

4. Cash receipts budget

5. Cash disbursements budget

6. Summary cash budget

7. Budgeted income statement

7. Projected production costs in 203 are as follows: 9. The predetermined overhead rate is $10 per direct-labour hour. The following productionoverhead costs are budgeted for 203. All of these costs will be paid in cash during the quarter incurred except for depreciation. 12. Frame-it's projected balance sheet as of December 31,202, follows: Cash Accounts receivable Inventory: Raw material Finished goods Plant and equipment (net of accummulated depreciation) Total assets Accounts payable Ordinary shares Retained earnings Total liabilities and shareholders' equity