LearnCo manufactures and sells one product, an abacus for classroom use, with two models, the Basic model and the Deluxe model. The company began operations on January 1, 2015, and is planning for 2016, its second year of operations, by preparing budgets from its master budget.

The company is trying to decide how many units to manufacture, how much it might spend on direct materials and direct labor, and what their factory overhead expenses might be. In addition, the company is interested in budgeting for selling and administrative costs, and in creating a budgeted income statement showing a prediction of net income for 2016.

You have been asked to assist the controller of LearnCo in preparing the 2016 budgets.

Sales Budget

The sales budget often uses the prior years sales as a starting point, and then sales quantities are revised for various factors such as planned advertising and promotion, projected pricing changes, and expected industry and general economic conditions. LearnCo has completed reviewing its prior years sales and has prepared the sales budget below.

After reviewing LearnCos sales budget, you note that three numbers have been omitted. The companys controller has told you that the units sold for the Basic and Deluxe models are expected to be the same. Fill in the missing amounts.

LearnCo
Sales Budget
For the Year Ending December 31, 2016
Product	Unit Sales Volume	Unit Selling Price	Total Sales
Basic Abacus		$7.00	$252,000
Deluxe Abacus			468,000
Totals	72,000		$720,000

Production Budget

The production budget should be integrated with the sales budget to ensure that production and sales are kept in balance during the year. The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels. The production budget for LearnCo is presented below.

You note that LearnCo has omitted six numbers from the production budget and fill in the missing amounts. You may need to use numbers from the sales budget you prepared.

LearnCo
Production Budget
For the Year Ending December 31, 2016
	Units Basic	Units Deluxe
Expected units to be sold (from Sales Budget)
Plus desired ending inventory, December 31, 2016	1,000	3,000
Total
Less estimated beginning inventory, January 1, 2016	1,050	2,100
Total units to be produced

Direct Materials Purchases Budget

The direct materials purchases budget should be integrated with the production budget to ensure that production is not interrupted during the year. This budget estimates the quantities of direct materials to be purchased to support budgeted production, along with desired inventory levels of direct materials.

Before you make any changes to the budget, you review the information in the Direct Materials Data Table below and enter the units to be produced from the Production Budget panel. After scanning the direct materials purchases budget (which is found below the Direct Materials Data Table), you observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. You may need to use numbers from the Direct Materials Data Table, or from the sales budget and production budget you prepared. When required, round your answers to the nearest dollar.

Direct Materials Data Table
	Wood Pieces	Beads
Packages required per unit:
Basic abacus	1	2
Deluxe abacus	2	3
Cost per package:
Wood pieces	$0.25
Beads	$0.25
Units to be produced (from Production Budget):
Basic abacus
Deluxe abacus

LearnCo
Direct Materials Purchases Budget
For the Year Ending December 31, 2016
	Wood Pieces	Beads	Total Direct Materials
Packages required for production:
Basic abacus
Deluxe abacus
Plus desired inventory, December 31, 2016	2,200	5,000
Total
Less estimated inventory, January 1, 2016	3,500	4,500
Total packages to be purchased
Unit price (per package)	x	x
Total direct materials to be purchased			$72,888

Direct Labor Cost Budget

Direct labor needs from the direct labor cost budget should be coordinated between the production and personnel departments so that there will be enough labor available for production.

Before you make any changes to the budget, you review the information in the Direct Labor Data Table below and enter the units to be produced from the Production Budget panel. After scanning the Direct Labor Cost Budget (which is below the Direct Labor Data Table), you observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. You may need to use numbers from the Direct Labor Data Table, or from the sales budget, production budget, and direct materials purchases budget you prepared. When required, round your answers to the nearest dollar.

Direct Labor Data Table
	Gluing	Assembly
Hours required per unit:
Basic abacus	0.10	0.10
Deluxe abacus	0.10	0.20
Labor hourly rate:
Gluing	$12.00
Assembly	$17.00
Units to be produced (from Production Budget):
Basic abacus
Deluxe abacus

LearnCo
Direct Labor Cost Budget
For the Year Ending December 31, 2016
	Gluing	Assembly	Total Direct Labor
Hours required for production:
Basic abacus
Deluxe abacus
Total
Times hourly rate	x	x
Total direct labor cost			$273,995

Factory Overhead Cost Budget

The factory overhead cost budget should be integrated with the production budget to ensure that production is not interrupted during the year. This budget may be supported by departmental schedules, which normally separate factory overhead costs into fixed and variable costs so that department managers may monitor and evaluate costs during the year. For simplicity, LearnCo has not separated costs in this manner.

After reviewing the factory overhead cost budget below, you note that LearnCo has completed the budget with the exception of one amount. Fill in the missing amount.

LearnCo
Factory Overhead Cost Budget
For the Year Ending December 31, 2016
Indirect factory wages	$5,400
Power and light
Depreciation of plant and equipment	1,450
Total	$18,100

Cost of Goods Sold Budget

The cost of goods sold budget integrates the direct materials purchases budget, direct labor cost budget, and factory overhead cost budget. Estimated and desired inventories for direct materials, work in process, and finished goods must also be integrated into the cost of goods sold budget. LearnCo has gathered some of the information for this budget below.

Complete the preparation of the cost of goods sold budget for LearnCo, using information provided by the controller below, and using the previous budgets you have prepared.

LearnCo
Cost of Goods Sold Budget
For the Year Ending December 31, 2016
Finished goods inventory, January 1, 2016			$9,870
Work in process inventory, January 1, 2016		$2,010
Direct materials:
Direct materials inventory, January 1, 2016	$2,000
Direct materials purchases
Cost of direct materials available for use	$
Less direct materials inventory, December 31, 2016	1,800
Cost of direct materials placed in production	$
Direct labor
Factory overhead
Total manufacturing costs
Total work in process during period		$
Less work in process inventory, December 31, 2016		1,250
Cost of goods manufactured
Cost of finished goods available for sale			$
Less finished goods inventory, December 31, 2016			1,500
Cost of goods sold			$

Selling/Admin Expenses Budget

The sales budget is often used as the starting point for the selling and administrative expenses budget. For example, a budgeted increase in sales may require more advertising expenses. LearnCo has prepared its selling and administrative expenses budget below. This budget is merely reviewed by you for use in the budgeted income statement.

LearnCo
Selling and Administrative Expenses Budget
For the Year Ending December 31, 2016
Selling expenses:
Sales salaries expense	$45,000
Advertising expense	15,000
Travel expense	5,400
Total selling expenses		$65,400
Administrative expenses:
Officers' salaries expense	$85,000
Office salaries expense	35,000
Office rent expense	26,000
Office supplies expense	6,400
Miscellaneous administrative expenses	1,600
Total administrative expenses		154,000
Total selling and administrative expenses		$219,400

Budgeted Income Statement

The budgeted income statement is prepared by integrating the sales budget, cost of goods sold budget, and selling and administrative expenses budget. Additional information that may be helpful in preparing the budgeted income statement are in the Budgeted Income Statement Data Table below.

Review the Budgeted Income Statement Data Table, then complete the budgeted income statement, found below the table. Round the calculated amount for income tax to the nearest whole dollar.

Budgeted Income Statement Data Table
Interest revenue for the year	$2,000
Interest expense for the year	$1,500
LearnCos income tax rate	40%

LearnCo

Budgeted Income Statement

For the Year Ending December 31, 2016

1	Revenue from sales
2	Cost of goods sold
3	Gross profit
4	Selling and administrative expenses:
5	Selling expenses
6	Administrative expenses
7	Total selling and administrative expenses
8	Income from operations
9	Other income:
10	Interest revenue
11	Other expenses:
12	Interest expense
13	Income before income tax
14	Income tax
15	Net income

Final Questions

Budgeting affects the planning, directing, and controlling functions of management. LearnCo wishes to determine the sensitivity of some of its budget values to changes in the economy.

Using the information on the completed budget panels, answer the questions below. Consider each question separately, assuming that all other data remains the same, including the level of production of each model.

1. LearnCo believes that sales of the Deluxe Abacus model may decrease in 2016. If Deluxe abacus sales are zero, what will be the effect on LearnCos income before income tax?

LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 2016.

If LearnCo sells zero Deluxe Abacus units in 2016, it will break even (i.e., the company will have zero income before income tax).

LearnCo will have a net loss before income tax if it sells zero Deluxe Abacus units in 2016.

2. LearnCo's vendor for bead packages is expected to double its price per package of beads. If this occurs, what will be the effect on LearnCos income before income tax?

LearnCo will still have positive income before income tax if the price for bead packages doubles.

LearnCo will have a loss before income tax if the price for bead packages doubles.

If the price for bead packages doubles, LearnCo will break even (i.e., the company will have zero income before income tax).

3. LearnCo is aware that its labor prices for the Gluing part of the manufacturing process may increase to $15.00 per hour due to changes in minimum wage laws in its state. If this occurs, what will be the effect on LearnCos income before income tax?

LearnCo will still have positive income before income tax if Gluing labor costs increase to $15.00 per hour.

If Gluing labor costs increase to $15.00 per hour, LearnCo will break even (i.e., the company will have zero income before income tax).

LearnCo will have a loss before income tax if Gluing labor costs increase to $15.00 per hour.

4. LearnCos controller believes that the company can decrease its selling expenses by 10% and its administrative expenses by 15%. How much would income before income tax increase if these expense cuts are implemented? Round your answer to the nearest dollar.