Optima Company is a high-technology organization that produces a mass-storage system. The design of Optimas system is unique and represents a breakthrough in the

industry. The units Optima produces combine positive features of both compact and

hard disks. The company is completing its fifth year of operations and is preparing to

build its master budget for the coming year (2010). The budget will detail each quarters

activity and the activity for the year in total. The master budget will be based on the

following information:

a. Fourth-quarter sales for 2009 are 55,000 units.

b. Unit sales by quarter (for 2010) are projected as follows:

First quarter 65,000

Second quarter 70,000

Third quarter 75,000

Fourth quarter 90,000

The selling price is $400 per unit. All sales are credit sales. Optima collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent is

collected in the following quarter. There are no bad debts.

c. There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter 13,000 units

Second quarter 15,000 units

Third quarter 20,000 units

Fourth quarter 10,000 units

d. Each mass-storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

e. There are 65,700 units of direct materials in beginning inventory as of January 1,

2010. At the end of each quarter, Optima plans to have 30 percent of the direct

materials needed for next quarters unit sales. Optima will end the year with the

same level of direct materials found in this years beginning inventory.

f. Optima buys direct materials on account. Half of the purchases are paid for in the

quarter of acquisition, and the remaining half are paid for in the following quarter.

Wages and salaries are paid on the 15th and 30th of each month.

g. Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents

depreciation. All other fixed expenses are paid for in cash in the quarter incurred.

The fixed overhead rate is computed by dividing the years total fixed overhead by

the years expected actual units produced.

h. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead

expenses are paid for in the quarter incurred.

i. Fixed selling and administrative expenses total $250,000 per quarter, including

$50,000 depreciation.

j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All

selling and administrative expenses are paid for in the quarter incurred.

k. The balance sheet as of December 31, 2009, is as follows:

Assets

Cash $ 250,000

Direct materials inventory 5,256,000

Accounts receivable 3,300,000

Plant and equipment 33,500,000

Total assets $42,306,000

Liabilities and Stockholders Equity

Accounts payable $ 7,248,000*

Capital stock 27,000,000

Retained earnings 8,058,000

Total liabilities and stockholders equity $42,306,000

*For purchase of direct materials only.

l. Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter,

$2 million of equipment will be purchased.

Required:

Prepare a master budget for Optima Company for each quarter of 2010 and for the year

in total. The following component budgets must be included:

-Direct labor budget

-Overhead budget

-Selling and administrative expenses budget

-Ending finished goods inventory budget

-Cost of goods sold budget (Assume that there is no change in work-in-process

inventories.)

-Cash budget

-Pro forma income statement (using absorption costing)

-Pro forma balance sheet