LO 2, 3, 4, 510-78Budgeting: comprehensive problemJudd's Reproductions makes reproduc- tions of antique tables and chairs and sells them through three sales outlets. The product line con- sists of two styles of chairs, two styles of tables, and three styles of cabinets. Although customers often ask Judd Molinari, the owner/manager of Judd's Reproductions, to make other products, he does not intend to expand the productline.

The planning group at Judd's Reproductions prepares a master budget for each fiscal year, which corresponds to the calendar year. It is December 2011, and the planners are completing the master budget for 2012.

456Chapter 10 Using Budgets for Planning andCoordination

Unit prices are $200, $900 and $1,800 for the chairs, tables, and cabinets respectively.Customers pay (1) by cash and receive a 5% discount, (2) by credit card (the credit card companytakes 3% of the revenue as its fee and remits the balance in the month following the month ofsale), or (3) on account (only exporters buy on account). The distribution of cash, credit card, and exporter sales is 25%, 35%, and 40%, respectively. Of the credit sales to exporters, Judd's Repro- ductions collects 30% in the month following the sale, 50% in the second month following thesale, and 17% in the third month following the sale, with 3% going uncollected. Judd's Repro- ductionsrecognizestheexpenseofcashdiscounts,creditcardfees,andbaddebtsinthemonth

of the sale.

Judd's employs 40 people who work in the following areas: 15 in administration, sales, and shipping; 2 in manufacturing supervision (director and a scheduler); 9 in manufacturing fabrica- tionandassembly(carpenters);and14inmanufacturing,finishing,andotherareas(helpers,clean- ers, and maintenancecrew).

The carpenter hours required to make the parts for and assemble achair,table, or cabinet are 0.4, 2.5, and 6,respectively.Production personnel have organized the work so that each carpenter hourworkedrequires1.5helperhours.Therefore,productionplannersmaintainaratioonaverage of1.5helpersforeverycarpenter.Thecompanypayscarpentersandhelpers$24and$14perhour,respectively (including allbenefits).

Judd'sReproductionsguaranteesallemployeespayforatleast172hourspermonthregardless of the hours of work available. When the employees are not doing their regular jobs, they under- takemaintenance,training,communityservice,andcustomerrelationsactivities.Judd'spayseach employee weekly for that week's work. If an employee works 172 hours or less during the month, Judd's still pays the employee for 172 hours at his or her normal hourly rate. The company pays 150%ofthenormalhourlyrateforeveryhourover172thattheemployeeworksduringthemonth. Planners add new carpenters if the projected total monthly overtime is more than 5% of the total regularcarpenterhoursavailable.Judd'shasapolicyofnoemployeelayoffs.Anyrequiredhiring is done on the first day of eachmonth.

For afactory,Judd's Reproductions rents a converted warehouse that costs $600,000 peryear.ThecompanypaysrentquarterlybeginningJanuary1ofeachyear.Judd'spaysotherfixedmanu- facturing costs, which include manufacturing supervision salaries and amount to $480,000 annu-ally,paid in equal monthly amounts.

Thecapital investment policyis topurchase, each Januaryand July,$5,000ofmachineryandequipmentpercarpenter employed during that month. Judd's recognizes depreciationattherateof 10% of theyear-end balanceof themachineryandequipment account.Statisticalstudiesofcost behavior have determined that supplies, variable support,andmaintenancecosts vary withthenumberofcarpenter hours workedand are $5,$20,and $15 per hour, respectively.

The units of wood required for chairs, tables, and cabinets are 1, 8, and 15,respectively.Each unit of wood costs $30. The inventory policy is to make products in the month they will be sold.Twosuppliersdeliverrawmaterialsandsuppliesasrequired.Thecompanypaysforallmaterials, supplies, variable support, and maintenance items onreceipt.

Annual administration salaries, fixed selling costs, and planned advertising expenditures are

$300,000, $360,000, and $600,000,respectively.Judd's Reproductions makes these expenditures in equalmonthlyamounts.Packagingandshippingcostsforchairs,tables,andcabinetsare$15,$65, and $135,respectively.Variableselling costs are 6% of each product's list price. Judd's Reproduc- tions pays packaging, shipping, and variable selling costs asincurred.

Usingitslineofcredit,Judd'sReproductionsmaintainsaminimumcashbalanceof$50,000.All line-of-credit transactions occur on the first day of each month. The bank charges interest on the line-of-creditaccountbalanceattherateof10%peryear.Judd'spaysinterestonthefirstdayofeach month on the line-of-credit balance outstanding at the end of the previous month. On the first of eachmonth,thebankpaysinterestattherateof3%peryearonfundsexceeding$50,000inthecom- pany's cash account at the end of the previousmonth.

Chapter 10Using Budgets for PlanningandCoordination457

Realized sales for October and November and expected sales for December 2011 appear in the following table:

JUDD'SREPRODUCTIONSUNITSALES2011

I_TEM

O_CTOBER

N_OVEMBER

D_ECEMBER

Chairs

900

975

950

Tables

175

188

201

Cabinets

90

102

95

Sales staff estimates the unit demand for 2012 as follows: chairs, 1,000, plus a random number uniformly distributed between 0 and 50, plus 15% of the previous month's sales of chairs; tables, 200, plus a random number uniformly distributed between 0 and 20, plus 15% of the previous month's sales of tables; and cabinets, 100, plus a random number uniformly distributed between 0and10,plus15%ofthepreviousmonth'ssalesofcabinets.Thisestimationprocessresultedinthe demand forecasts and the sales plan found in the followingtable:

JUDD'SREPRODUCTIONSPROJECTEDUNITSALES2012

M_ONTH

C_HAIRS

T_ABLES

C_ABINETS

January

1,020

200

109

February

1,191

237

120

March

1,179

243

119

April

1,195

250

126

May

1,200

252

122

June

1,204

255

125

July

1,194

242

123

August

1,199

253

121

September

1,222

243

127

October

1,219

248

126

November

1,207

244

126

December

1,192

255

119

Planners project the Judd's Reproductions balance sheet at January 1, 2012, to be as follows:

JUDD'SREPRODUCTIONSBALANCESHEETJANUARY1, 2012

Cash

$50,000

Bank loan

$0

Accounts receivable

575,008

Machinery (net book value)

360,000

Shareholder's equity

985,008

Total

$985,008

Total

$985,008

Required

(Round quantities up in the problem.)

(a) Make a sales forecast, staffing plan, production plan, estimated cash flow statement, pro formaincomestatementfortheyearendedDecember31,2012,andproformabalancesheetat December 31,2012.

(b)The level of bad debts concerns the Judd's Reproductionscontroller.If Judd's insists on cash payments from exporters who would be given the cash discount, the sales staff expects that total sales to exporters in 2012 will fall by 5% (sales in2011will not be affected). Based on the effectofthischangeonprofitability,isitdesirable?(Roundsalesforecaststothenearestunit.)

458Chapter 10 Using Budgets for Planning andCoordination

(c)Ignore thechanges described in part b and return to the data in the original example.The sales staff is considering increasing the advertising budget from $600,000 to $900,000 and cut- ting prices by 5% beginning on January 1, 2012. This should increase sales by 30% in 2012.

Based on the effect of this change on profitability, is it desirable? (Round sales forecasts to the nearest unit.)

(d)Isthereacriterionotherthanprofitabilitythatmaybeusedtoevaluatethedesirabilityofthe changes proposed in parts b and c? If yes, what is that criterion, and why is it important? If no, why is profitability the sole relevantcriterion?