NATSU DRAGNEEL CORPORATION CASE Preparing Operating Budgets Natsu Dragneel manufactures one kind of scarf. These scarves are white with black stripes. Each scarf sells for $17 and requires: Raw Materials are $8 per linear foot of fabric and each scarf requires 0.5 linear foot of direct materials 30 minutes of labor hours to manufacture the scarf (Labor cost is $16.00 per hour) Natsu Corp. has the following inventory policies: Ending finished goods inventory should be 70% of next months sales. Ending finished goods as of September 30th are 16,800 scarves. Ending inventory of raw materials should be 20% of next months production need. Ending raw materials inventory as of September 30th is 4,375 linear feet of material and the budgeted raw materials inventory is 1,980 linear feet of material. As per the Marketing and Sales department of the Natsu Corp., sales are high in the 2 months before winter weather occurs. Therefore, months of October and November are considered high demand months. In an August budget meeting of the current year, the Sales Manager provided following estimates of unit sales for the upcoming months (October current year January next year): September 20,000 scarves October 21,000 scarves November 19,000 scarves December 20,000 scarves January 24,000 scarves Variable manufacturing overhead is incurred at a rate of $2.70 per direct labor hour. Annual fixed manufacturing overhead is estimated to be $240,000 ($20,000 per month). 240,000 scarves are anticipated to be produced each year. Fixed selling and administrative expenses are estimated at $12,500 per month and variable selling and administrative expenses are sales commissions and are estimated at 10% of sales. These commissions are paid in the same month of the sale. Of its sales each month, 30% of sales are cash sales and are collected in the month of the sale and 70% credit sales which are collected in the month following the sale. Of the purchase of raw materials, all are made on credit and paid in the month following the purchase. Also, all other operating costs are paid during the month incurred. During December, Natsu plans to pay $100,000 for a piece of equipment to replace an old equipment. Natsu had $40,000 cash on hand on September 1. The company has a policy to maintain a monthly minimum cash balance of $40,000. The company may borrow any amount using the credit line provided by their bank to pay for deficits and maintain the minimum required balance of cash. Borrowings or any part of the borrowings may be paid off in the month there is excess cash available (Ignore interest on borrowings). Requirements: 1. Using the information provided above prepare the following budgets for the fourth quarter of the year (October - December) for Natsu Corporation. Include each month and quarter 4 (October - December) total for each budget. a. Sales budget b. Production budget c. Raw Materials budget check figure for October = $50,760 d. Manufacturing Overheads budget e. Budgeted Cost of Goods Sold (COGS) f. Selling and administrative expenses budget 2. Prepare Natsus budgeted income statement for quarter 4 (October - December). 3. Prepare the following for Natsu for quarter 4: a. Budgeted cash receipts/collection each month (including quarter 4 total) b. Budgeted cash payments each month (including quarter 4 total) c. Cash budget of Natsu for quarter 4. 4. After completing requirements 1-3 above revise the budget spreadsheet in a new worksheet to include following changes (you can copy and paste the current spreadsheet in a new worksheet to incorporate following changes): Natsu Corp. is contemplating to increase the selling price of the Scarves by 10% during the high sales months of October and November. The management of Natsu believes that it would affect unit sales marginally only, thereby, reducing unit sales by 5% in those two months. How would these two changes affect the net income of Quarter 4? What is net income from the original data and net income on the revised data? What is the difference in net income between the original data and the revised data? Based on the analysis, should Natsu Corp. increase the price of scarves temporarily during those high demand months? Include a short explanation in Excel file itself. (You need to revise your Excel spreadsheet to determine the effect on income statement. If you used your formulas correctly for requirements 1-3, you will not need to make whole lot of changes to your spreadsheet). 5. Save a copy of the Excel solution file after completing requirement 4 on your computer or flash drive. 6. Submit your Excel file you saved in requirement 5 above (with original and revised estimates) on the eLearning Dropbox (You should not revise your excel file to the original data, you should have two complete tabs within excel, the original data and the revised data).