Mary Alice Kirkpatrick invented a process that converts liquid waste into a sweet-smelling candle that burns off the waste in an environmentally friendly way. MAK, as her friends call her, has turned that invention into a large-scale company and is now preparing the budget for the quarter ended March 31. She has gathered the following information.

1. Brad Harmon, MAK's sales manager, reported that the company sold 60,000 candles in December. He has developed the following sales forecast. The expected sales price is $35 per candle.

January

February

March

April

May

55,000 50,000 45,000 46,000 48,000

2. All sales are made on account. Historically, the company has collected 75% of its sales in the month of sale and 20% in the month following the sale. The remaining 5% of sales are uncollectible.

3. Sales personnel receive a 3% commission on every candle sold in addition to their monthly salaries. 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 March (see part 8).

Monthly Fixed Selling and

Administrative Costs

Depreciation

$5,000

Salaries of sales personnel

33,255

Advertising

12,000

Management salaries

24,000

Total costs

$74,255

4. The company requires ending finished goods inventory to equal 15% of the following month's budgeted sales, in units. On December 31, 8,200 candles were on hand.

5. Ten ounces of raw materials are required to create each finished candle. The company wants to have raw materials on hand at the end of each month equal to 20% of the following month's production needs. On December 31, 109,000 ounces of materials were on hand.

6. The raw materials used in production cost $2.00 per ounce. Eighty percent of the month's purchases are paid for in the month of purchase; the rest is paid in the following month. No discount is available.

7. The standard labor allowed for one candle is 18 minutes. The current direct labor rate is $16 per hour.

8. On March 1, the company plans to spend $72,000 to replace its office equipment that is fully depreciated. The new equipment is expected to have a ten-year life, with no residual value.

9. The budgeted monthly variable and 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 600,000 candles.

Monthly Fixed

Overhead

Variable Cost/Unit

Depreciation

$ 15,000

Indirect materials

33,000 $0.20

Indirect labor

86,000 0.40

Utilities

27,000 0.20

Property taxes

16,000

Maintenance

35,500 0.40

Total costs

$212,500 $1.20

10. MAK must maintain a minimum cash balance of $100,000. An open line of credit at a local bank allows the company to borrow up to $200,000 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 only when the principal is repaid. The interest rate is 6% per year.

12. A quarterly dividend of $60,000 will be declared and paid in January.

13. Income taxes payable for the first quarter will be paid on January 15. MAK's tax rate is 35%.

14. The December 31 balance sheet is as follows:

December 31

Cash

$ 105,000

Accounts receivable

420,000

Raw materials inventory

218,000

Finished goods inventory

248,050

Plant & equipment

640,000

Accumulated depreciation

(160,000)

Total assets

$ 1,471,050

Accounts payable

$ 243,000

Income taxes payable

76,000

Common stock

245,000

Retained earnings

907,050

Total liabilities and equities

$ 1,471,050

(a)