Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x1, and the group was discussing preparation of the firms master budget for 20x2. I've decided to go ahead and purchase the industrial robot weve been talking about. Well 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. Well finance these purchases with a oneyear $1,000,000 loan from Shark Bank and Trust Company. Ive 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 firms 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 9inch by 24inch glass sheets. Each S frame requires a 2foot metal strip; an L frame requires a 3foot metal 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 20x2. She has gathered the following information:

1. Sales in the fourth quarter of 20x1 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 20x2 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 companys 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 20x2.

4. The production manager attempts to end each quarter with enough finishedgoods inventory in each product line to cover 20 percent of the following quarters sales.

5. Photo Artistry makes an attempt to end each quarter with 20 percent of the glass sheets needed for the following quarter's production. The company wants to have an inventory of 10,400 sheets at the end of 20x2.

6. Metal strips are purchased locally and the company buys them on a justintime basis. Inventory of metal strips is negligible.

7. All directmaterial purchases are made on account, and 80 percent of each quarters purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.

8. Indirect materials are purchased with cash as needed. Workinprocess is negligible.

9. Projected manufacturing costs in 20x2 are as follow:

	S Frame		L Frame
Direct material:
Metal strips:
S: 2 ft. @ $1 per foot	$2.00
L: 3 ft. @ $1 per foot			$3.00
Glass sheets:
S: sheet @ $8 per sheet	2.00
L: sheet @ $8 per sheet			4.00
Direct labor:
.1 hour @ $20	2.00		2.00
Manufacturing overhead:
.1 hour @ $10	1.00		1.00
Total manufacturing cost per unit	$7.00		$10.00

10. Manufacturing equipment depreciation is $20,000 per quarter.

11. Photo Artistrys quarterly selling and administrative expenses are $100,000, paid in cash. The company rents all its administrative office space and equipment. Thus, there is no depreciation related to the administrative functions of the company.

12. The $1,000,000 loan from Shark Bank and Trust Company will be received on January 1, 20x2. Photo Artistry will use all the money immediately to purchase new equipment. Interest payments will be made at the end of each quarter. Loan principal will be paid in four equal installments of $250,000 at the end of each quarter.

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

14. Photo Artistrys projected balance sheet as of December 31, 20x1, follows:

Cash	$ 95,000
Accounts receivable	132,000
Inventory:
Raw material	59,200
Finished goods	167,000
Plant and equipment, net	8,000,000
Total assets	$ 8,453,200
Accounts payable	$ 99,400
Common stock	5,000,000
Retained earnings	3,353,800
Total liabilities and stockholders' equity	$ 8,453,200

Photo Artistry Company Manufacturing Overhead Budget For the year ended December 31, 20x2 Quarter 1 2 3 4 Year Budgeted direct labor hours (Schedule 4) overhead rate Total manufacturing overhead Less depreciation Cash disbursement for MOH Total manufacturing overhead (a) Budgeted direct labor hours (b) Predetermined overhead rate for the year (a) = (b) Photo Artistry Company Ending Finished Goods Inventory Budget For the year ended December 31, 20x2 Cost Total Production Cost per S-Frame Metal strips Glass sheets Direct labor Manufacturing overhead Unit product cost Quantity feet sheet hours hours per feet per sheet per hour per hour Budgeted finished good inventory of S-Frames: Ending finished goods inventory in units (Schedule 2) Unit product cost (see above) Ending finished goods inventory in dollars Cost Total Production Cost per L-Frame Metal strips Glass sheets Direct labor Manufacturing overhead Unit product cost Quantity feet sheets hours hours per feet per sheet per hour per hour Budgeted finished good inventory of L-Frames: Ending finished goods inventory in units (Schedule 2) Unit product cost (see above) Ending finished goods inventory in dollars Finished Inventory balance (S-frames + L-frames) Photo Artistry Company Sales and Administrative Expense Budget For the year ended December 31, 20x2 Quarter 1 2 3 4 Year Budgeted S&A expenses Cash disbursements for S&A expenses Cash Budget For the year ended December 31, 20x2 1 Quarter Schedule 1 2 3 4 Year 1 3 Cash balance, beginning Add receipts: Collections from customers Total cash available Less disbursements: Direct materials Direct labor Manufacturing overhead Selling and administrative Dividends Equipment purchase Total disbursements Excess (deficiency) of cash over disb. 4 5 7 Financing: Borrowings Repayments Interest Total financing Cash balance, ending Photo Artistry Company Budgeted Income Statement For the year ended December 31, 20x2 Schedules 1 1,6 Sales Less cost of goods sold Gross Margin Less selling and administrative expenses Net operating income Less interest expense Net income 7 00 8 Photo Artistry Company Budgeted Balance Sheet For the year ended December 31, 20x2 Assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable (raw mat.) Total Liabilities Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Plant and equipment: Buildings and equipment Accumulated depreciation Plant and equipment, net Total assets Stockholders' equity: Common stock, no par Retained earnings Total stockholders' equity Total liab. and stockholders' equity