Master Budget Case: Forward Drones As part of the continued advancement of technology, a drone camera market has emerged in recent years. The drone camera market has been growing as more photography enthusiasts have begun adopted this high-tech approach to capturing still images and video using remotely controlled devices. Eager to capture a share of this growing market, Forward Drones entered the market in early 2021. Forward Drones manufacturescamera drones, selling primarily to retailers. Forward Drones is pleased with its financial performance over its first few years of operations, optimistic to achieve continued financial success. For planning and control purposes the company utilizes a monthly master budget, which is usually developed at least three months in advance. The company has a fiscal year ending December 31. It is now December 2022. You have been asked to prepare the Master Budget for the quarter ending March 31, 2023. Based on your discussions with the various departments throughout the company, you have collected the following relevant information for preparing the budget: Sales 1. The marketing department is forecasting the following monthly sales for the quarter ending March 31, 2023: January 2023: 100 units at $1,900 each 2023: 110 units at $1,900 each Manufacturing Costs and Inventory 2. Each camera drone spends a total of 3.5 hours in production. February 2023 : 120 units at $1,900 each Sales will increase by about 10% per month after March March Page1of6 3. Due to the highly technical nature of Forward Droness manufacturing process, Forward Droness direct labour rate averages $35.00 per hour. This rate already includes the employers portion of employee benefits. 4. Each camera drone requires 1.25kg of direct materials. The average cost of direct materials is $57/kg. The supplier of the direct materials tends to be somewhat erratic, so Forward Drones finds it necessary to maintain a direct materials inventory balance equal to 40% of the following months production needs as a precaution against stock-outs. 5. Due to the similarity of the equipment in each of the production stages and the companys concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The variable manufacturing overhead rate is $170/unit, consisting of: $ 70 Plant & Equipment Maintenance Utilities 40 Indirect Materials 30 Other 30 Supervisors salary Amortization of Plant & Equipment Insurance Training & Development Property and Business Taxes Other 181,800 $ 132,000 84,000 54,750 48,000 30,000 $ 530,550 $ 170 6. The fixed manufacturing overhead costs are as follows: Amortization is calculated using the straight-line method, with no amortization calculated in the year capital assets are acquired. 7. From previous experience, management has determined that an ending finished goods inventory equal to 25% of the next months sales is required to efficiently meet customer demands. Page2of6 Collections Pattern 8. Sales are all on credit basis, with 59% collected during the month of the sale and 41% the following month. There are no early payment discounts for customers. 9. Accounts receivable as at end of business day on December 31, 2022 is projected to be $56,000 Payments Pattern 10. Forward Drones pays for 70% of a months purchases of direct materials in the month of purchase, 30% in the following month. There are no early payment discounts offered by suppliers. 11. Accounts payable as at end of business day on December 31, 2022 is projected to be $3,200 12. All payroll costs are paid in the period in which they are incurred. 13. The property and business taxes, paid at the beginning of July each year, apply to the following 12-month period. 14. Annual insurance premiums, paid at the beginning of April each year, apply to the following 12-month period. 15. Fixed manufacturing overhead costs are incurred evenly over the year and cash- related amounts are paid as incurred. 16. Selling and administrative expenses are paid in the month in which they occur. Other 17. Anticipating a significant increase in customer demand and market share over the next few years, Forward Drones is planning a significant expansion involving acquiring Page3of6 additional manufacturing equipment for $250,000 cash. This amount will be paid in March 18. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Based on prior year experience: Lowest level of monthly sales:60 units ... Total Operating Expenses: $87,270* Highest level of monthly sales:120 units ... Total Operating Expenses: $120,780* * excluding amounts described below 19. Income tax expense is estimated to be 25% of net income. Forward Drones makes monthly income tax installment payments of $2,500 and pays all outstanding income taxes (in excess of installment payments) in March of the following year. As such, any outstanding income tax balance for the year ended December 31, 2022 will be paid in March 2023. 20. An arrangement has been made with the local bank that if Forward Drones maintains a minimum balance of $50,000 in their bank account, they will be given a line of credit at a preferred rate of 3% per annum (0.25% per month). All borrowing/repayment is considered to happen at beginning of month. All borrowings and repayments from the bank should be in multiples of $10,000 and interest must be paid the following month. Interest is accrued on the balance at the end of month in which borrowing/repayment happened. 21. Forward Drones has a policy of paying dividends at the end of each quarter. The President tells you that the Board of Directors is planning on paying a $100,000 dividend on March 31, 2023: Page4of6 22. The company is forecasting the following balances as at the end of business day on December 31, 2022: Assets Cash Accounts Receivable Inventory: Direct Materials Inventory: Finished Goods Prepaid Property and Business Taxes Prepaid Insurance Capital Assets (net) Total Assets Liabilities and Shareholders Equity Accounts Payable Income Taxes Payable Capital Stock Retained Earnings Total Liabilities and Shareholders Equity $ 80,000 $56,000 2,337 16,285 24,000 21,000 571,800 $771,422 $ 3,200 19,700 500,000 248,522 $771,422