Need help on question 6 please!

KATRINA'S KIDS Katrina's Kids is a non-profit formed in the aftermath of the fury that hit the New Orleans area in A ugust 2005. The mission of this organization is to make library grants to schools in any of the areas hit by Hurricane Katrina. Funds are being raised through the manufacture and sale of popular beaded bracelets to retailers throughout the U.S. Katrina'sKids hopes to spread word of the disastrous impact on education for these children by advertising their mission via store displays. In the current year, 2006, Katrina's Kids (KK) anticipates a surplus of $1,100,000 based upon sales of $6,840,000. Given a very successful first year with little effort, key members of the management team feel that they can expand the market significantly if they could use a publicity campaign that would make written materials more available throughout the nation. This would increase selling and administrative expenses by $125,000, however it is believed that this will result in a 17% increase in bracelet sales in 2007. This bump in sales could be realized at a critical time asKKplanstobegin disseminating funds sometime during the next year. Other proposed changes for 2007 include changes inthe stringing process that would result in variable manufacturing overhead of $1.95/bracelet. This major change would cost approximately $500,000 for machinery, which is expected to have a userl life of 10 years. Management believes that this machinerywculd serve to increase factory capacity from 750,000 units to 1,100,000 units. KKwouldpurchase this machinery in the rst quarter (January) of 2007 and pay for it in March. All bracelets are sold to retail outlets on credit. Collections for bracelets are typically made as follows: 50% in the month of sale and 50% in the month following the month of sale. Depreciation is computed using the straight-line method and, a hill year of depreciation will be taken in the rst year. Cash disbursements for raw materials are made in the m o nth after the purchase. Other expenses arepaid for as incurred. KKkeeps a supply of bracelets on hand at the end of every month equivalent to one month's sales. Raw materials are purchased on an as needed basis, so at the end of the month there is no balance in raw m aterials inventory. Required 1) Prepare a production budget for 2007 showing the number of units produced. Note: It will be useful to prepare the budget by month where you assume production is evenly distributed throughout the year. 2) Determine the budgeted cost of goods manufactured and cost of goods sold for 2007. Note: You may find it useil to reference your production budget from question I. 3) Prepare a cash budget for 2007. Note: You may find it useful to reference your production budgetom question I and 2. 4) Prepare a budgeted income statement for 2007. 5) Katrina's Kids is concemed that the expansion of production capacity may require external sources of nancing. What is the amount of nancing that Katrina's Kids will need to arrange and by when? What do you recommend Katrina Kids do to secure the requisite nancing? 6) Based on your budgeted income statement for 2007, do you recommend Katrina's Kids undertake the proposed changes? Why? . Prepare a budgeted income statement for 2007. Budgeted Income Statement (2007) Sales 8,002,800 Less: Cost of Goods Sold ( 4,863,769) Gross Margin 3,139,031 Expenses: (1,751,224) Selling and administrative (1,11 1,000) expenses Commissions (5% of sales) (400,140) Shipping (3% of sales) (240,084) Net Income / Surplus 1,387,807 Sales = 6,840,000 * 117% = 8,002,800 Sales in units = 570,000 * 117% = 666,900 units Cost of Goods Sold: Direct Materials Direct Labor Variable MOH 1.95 Total 6.95 Units to be produced 671,475 Variable Costs 4, 666,751 Fixed Costs 230,000 COGM 4,896, 751 Finished goods, beginning 372,300 Finished goods, ending (405,282) Cost of Goods Sold 4,863,769 Units to be produced: Units Sold 666,900 Add: Ending Inventory 55,575 Less Beginning Inventory (51,000) 671,475 units Finished goods, ending = 4,896,751/ 671,475 units = 7.29 * 55,575 = 405,282 **Ending inventory is equivalent to one month's sales (666,900/12) Fixed Manufacturing Costs: Current Depreciation 180,000 New machinery Depreciation = 500,000 / 10 = 50,000 Total 230,000 Selling and administrative expenses = 986,000 + 125,000 = 1,111,000 COGS broken down monthly 4863769/12 = 405311.6 Revenue broken down monthly = ((55575*12)/2) + (570000/2) = 618450