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 Klandon's 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 month's 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 raw materials on hand at the end of each month equal to 10% of the following month's 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 month's purchases is 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 total fixed overhead 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 Variable Cost/Unit Depreciation Indirect materials Indirect labor Utilities Property taxes Maintenance Total costs Fixed Monthly Overhead $8,000 2,500 13,000 18,000 4,000 7,000 $52.500 $0.08 0.27 0.15 0.25 $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) 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 1. 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 only when principal is repaid. The interest rate is 12% per year. 2 A quarterly dividend of $53,000 will be declared and paid in April. 3. Income taxes payable for the first quarter will be paid on April 15. Klandon's tax rate is 30% 4. The March 31 balance sheet is as follows: 14. The March 31 balance sheet is as follows: Cash Accounts receivable Finished goods inventory Raw materials inventory Plant & equipment Accumulated Depreciation Total assets March 31 $40,000 93,750 21,600 73,000 200,000 (50,000) $378 350 Accounts payable Income taxes payable Common stock Retained 3arnings Total liabilities and equities $12,000 24.000 52,000 290,350 $378.350 Required a Prepare all components of Klandon's master budget for the second quarter. Sales Budget April 20,000 10 200,000 May 50,000 10 500,000 June 30,000 10 300,000 Quarter 100,000 10 1,000,000 S $ $ S $ Selling & Administrative Expense Budget June April 10.000 $ S 35,000 1,000 10,000 500 10,000 May 10,000 50,000 1,000 10,000 500 25,000 10.800 40,000 1,000 10,000 500 15,000 $ $ $ $ $ $ $ Quarter 30,800 125,000 3,000 30,000 1,500 50,000 $ 66.500 $ 96,500 S 77.300 240,300 Production Budget April May June Quarter July Materials Purchase Budget April May June Quarter July Direct Labor Budget April May June Quarter Manufacturing Overhead Budget April May June Quarter Ending Inventory and Costs of Goods Sold Budget Cash Receipts Budget April May June Total Cash Receipts Bad Debts Accounts Receivable Cash Payments for Materials Budget April May June Total Cash Payments Accounts Payable Cash Budget April May June Quarter Prepare a pro-forma income statement for the second quarter. Solve Sales Cost of goods sold Gross profit Selling & administrative expense Operating income Interest expense Income before taxes Income tax expense (30%) Net income c. Prepare a pro-forma balance sheet as of June 30. Solve Cash AIR Raw Materials Inventory Finished Goods Property, Plant & Equipment Less: Accumulated Depreciation Total Assets A/P Income Taxes Payable Note Payable Common Stock Retained Earnings Total Liabilities & Equities