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Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information:

Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information:

1. Klandons sales manager reported that the company sold 15,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $25 per bag.
April 18,000 bags
May 22,000 bags
June 20,000 bags
July 24,000 bags
August 16,000 bags
2. Sales personnel receive a 4% commission on every bag of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June (see part 7).

Monthly Fixed Selling and Administrative Costs

Variable Cost/Unit

Depreciation

$10,000

Salaries of sales personnel

25,000 $1.00

Advertising

1,000

Management salaries

10,000

Miscellaneous

500

Bad debts

Total costs

$46,500 $1.00
3. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending Finished Goods Inventory to equal 20% of the following months budgeted sales, in units. On March 31, 4,000 bags were on hand.
4. Eight pounds of direct materials are required to fill each bag of finished rocks. The company wants to have direct materials on hand at the end of each month equal to 10% of the following months production needs. On March 31, 13,000 pounds of materials were on hand.
5. The direct materials used in production cost $1.25 per pound. Sixty percent of the months purchases are paid for in the month of purchase; the remaining 40%, in the following month. No discount is available.
6. The standard labor allowed for one bag of rocks is 30 minutes. The current direct labor rate is $12 per hour.
7. On June 1, the company plans to spend $60,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value. While full-depreciated, the old equipment will be retained in service.
8. The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 420,000 bags.

Monthly Fixed Overhead

Variable Cost/Unit

Depreciation

$8,000

Indirect materials

2,500 $0.08

Indirect labor

13,000 0.27

Utilities

18,000 0.15

Property taxes

4,000

Maintenance

7,000 0.25

Total costs

$52,500 $0.75
9. All sales are made on account. Historically, the company has collected 70% of its sales in the month of sale and 25% in the month following the sale. The remaining 5% of sales is uncollectible (and is included in the previous selling and administrative bad debt expense information).
10. Klandon must maintain a minimum cash balance of $40,000. An open line of credit at a local bank allows the company to borrow up to $175,000 per quarter in $1,000 increments.
11. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid any time a principal payment is made. The interest rate is 12% per year.
12. A quarterly dividend of $53,000 will be declared and paid in April.
13. Income taxes payable for the first quarter will be paid on April 15. Klandons tax rate is 30%.
14. The March 31 balance sheet is as follows:

March 31

Cash

$40,000

Accounts receivable

93,750

Raw materials inventory

21,600

Finished goods inventory

73,000

Plant & equipment

200,000

Accumulated depreciation

(50,000)

Total assets

$378,350

Accounts payable

$12,000

Income taxes payable

24,000

Common stock

52,000

Retained earnings

290,350

Total liabilities and equities

$378,350

After preparing the budget for the second quarter, Kim Klandon was not satisfied with the projected results and began to investigate the following alternative.

d. Klandon would like to reduce the age of accounts receivable to better manage the cash cycle. Instead of charging a fee for accounts that are paid in the second month after sale, she wants to offer a 2% cash discount. Since the company cannot afford to have total revenue decrease, Klandon plans to increase the sales price to $25.50 per bag. Customers who pay with cash at the time of purchase wont see any increase in their costs, but customers who purchase on account and pay later will. Klandon anticipates the following collection pattern if such a change is made:

Cash sales 40 %
Credit:
Month of sale 30 %
Month after sale 25 %
Uncollectible 5 %
100 %

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Prepare a pro-forma balance sheet as of June 30. (List Assets in order of liquidity) Balance Sheet as of 6/30 $ Income Taxes Payable Accounts Payable Total Liabilities and Equities Accounts Receivable Total Assets Direct Materials Inventory Accumulated Depreciation Common Stock Finished Goods Cash Note Payable Retained Earnings Property. Plant & Equipment >

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