Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x4, and the group was discussing preparation of the firm's master budget for 20x5. "l'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 Shark Bank and Trust Company. l've negotiated a repayment schedule of four equal installments 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 Photo Artistry Company is a manufacturer of metal picture frames. The firm's two product lines are designated as S (small frames; 5 7 inches) and L (large frames; 8 10 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Each S frame requires a 2-foot metal strip; an L frame requires a 3-foot 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, Photo Artistry's controller, is in charge of preparing the master budget for 20x5. She has gathered the following information 1. Sales in the fourth quarter of 20x4 are expected to be 50,000 S frames and 40,000 L frames. | he 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 20x5 are expected to be 55,000 units 2. Photo Artistry'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 20x5 4. The production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter's sales Moreover, 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 7. Projected production costs in 20x5 are as follows: S Frame LFrame Direct material: Metal strips: $%2 S: 2 ft. @ $1 per foot L: 3 ft. @ $1 per foot $ 3 Glass sheets: S: sheet @ $8 per sheet L: sheet @ $8 per sheet 2 4 Direct labor 1 hour $20 Production overhead: 2 2 Total production cost per unit %7 $10 8. The predetermined overhead rate is $10 per direct-labor hour. The following production-overhead costs are budgeted for 20x5 1st Quarter Quarter 2nd 3rd Quarter 4th Quarter Entire Year Indirect $ 10,200 $ 11,200 $ 12,200 $ 13,200 $ 46,800 material Indirect labor 40,800 44,800 48,800 52,800 187,200 Other 31,000 36,000 41,000 46,000 154,000 overhead Depreciation 20,000 20,000 20,000 20,000 80,000 Total $102,000 $112,000 $122,000 $132,000 $468,000 overhead All of these costs will be paid in cash during the quarter incurred except for depreciation 9. Photo Artistry's quarterly selling and administrative expenses are $100,000, paid in 10. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each 11. Photo Artistry's projected balance sheet as of December 31, 20x4, follows: cash quarter $ 95,000 132,000 Accounts receivable Inventory: Raw material 59,200 167,000 Finished goods Plant and equipment (net of accumulated 8,000,000 depreciation) Total assets $8,453,200 Accounts payable Common stock Retained earnings $ 99,400 5,000,000 3,353,800 Total liabilities and stockholders' equity $8,453,200 4. Prepare Photo Artistry Company's direct-material budget for Q4(20x4) and 20x5. (Round "Glass quantity per unit (sheets)" answers to 2 decimal places.) 20x4 20x5 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Metal strips: S frames to be produced x Metal quantity per unit (ft.) Needed for S frame production L frames to be produced x Metal quantity per unit (ft.) Needed for L frame production Total metal needed for production; to be purchased (ft.) x Price per foot Cost of metal strips to be purchased Glass sheets: x Glass quantity per unit (sheets) Needed for S frame production L frames to be produced x Glass quantity per unit (sheets) Needed for L frame production Total glass needed for production (sheets) 10,400 Add: Desired ending inventory Total glass needs Less: Expected beginning inventory Glass to be purchased x Price per glass sheet Cost of glass to be purchased 10,400 Total raw-material purchases (metal and glass)