Question
Paulson Paint, Inc. produces two qualities of paint: Magnificent (Interior Paint Department) and Marvelous (Exterior Paint Department). The company was established 12 years ago and
Paulson Paint, Inc. produces two qualities of paint: Magnificent (Interior Paint Department) and Marvelous (Exterior Paint Department). The company was established 12 years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 7 years. In 2016, a second type of paint was introduced, and sales of this product have increased each year due to effective sales campaigns and efforts. The president is currently concerned about the inefficient use of capacity and the effect this has on profitability. All raw materials are currently purchased from outside suppliers and no difficulty is foreseen in obtaining the necessary inventories for production in the future. All inventories are currently considered to be at the lowest safe levels given the delivery, production, and sales cycles. Given the current production capacity, the company will have room for expansion for the next few years without building new facilities or expanding the current building. The company will also have the option of starting a second production shift to support future sales if necessary; therefore, increased production will be obtainable through purchasing additional equipment or increasing production hours. At this time, however, the president is relunctantly considering a second shift due to the additional $1.50 per hour shift differential that would be necessary to pay hourly second-shift workers. The company experienced cash flow issues in 2018 but has always managed to make all payments on a timely basis. The president wishes to increase the amount of cash on hand in the future so that the company will have a greater margin of safety. To date, the company has not had difficulty obtaining financing for expansion and does not foresee any future difficulties in obtaining necessary funding for legitimate purposes.
Department Structure Paulson Paint, Inc. has two separate departments, one for each of the paint types. As the end products are not distinguishable, the company uses process costing, employing a FIFO inventory system. Absorption costing is used for all outside reports. All nondirect fixed costs are allocated using various allocation bases as indicated throughout the project. The company does not use a full ABC costing system; however, it does employ some of the ABC concepts in the budgeting process. The Administrative Department handles all of the purchasing, accounting, and secretarial duties in a highly efficient manner. There is no need for separate departments at this time.
2018 Information
Interior Paint Department | Exterior Paint Department | |
---|---|---|
Number of machines available | 27 | 20 |
Annual capacity per machine | 18,000 gallons | 18,000 gallons |
Annual production capacity | 432,000 gallons | 378,000 gallons |
Machine hours available per machine | 2,000 hours | 2,000 hours |
Standard machine hour per gallon | .12 hour/gallon | .12 hour/gallon |
Standard labor hour per machine hour | 1.25 labor hour/machine hour | 1.25 labor hour/machine hour |
Actual sales volume | 440,000 gallons | 295,700 gallons |
Number of hourly employees | 31 | 22 |
Supervisors (1 per each 8 hourly employee) | 4 | 3 |
Raw Material Prices: Cans | $.50 each | $.50 each |
Raw Material Prices: Pigment | $2.85 per pound | $3.90 per pound |
Raw Material Usage: Cans | 1 per gallon | 1 per gallon |
Raw Material Usage: Pigment | 2 pounds per gallon | 2 pounds per gallon |
Direct labor rate | $10.25 per hour | $10.25 per hour |
The Sales Department feels very good about the prospects for 2019. The reputation of the new product, Marvelous Paint, has increased significantly due to effective advertising in the past few years. The Sales Department is ready to launch a major advertising campaign, which is expected to continue the trend of the last 3 years for the Marvelous brand, even with a small price increase per gallon.
Magnificent Paint has been produced since the company began production. The sales level of this product has been rather stagnant for the last 5 years, and that trend is expected to continue in the future.
The following information for the two products has been gathered.
Magnificent Paint | Marvelous Paint | |
---|---|---|
Anticipated Sales Price - 2019 | $14.50 per gallon | $18.75 per gallon |
Actual Sales Price - 2014 | 424,000 gallons | None |
Actual Sales Price - 2015 | 425,000 gallons | None |
Actual Sales Price - 2016 | 413,000 gallons | 226,560 gallons |
Actual Sales Price - 2017 | 453,000 gallons | 259,000 gallons |
Actual Sales Price - 2018 | 440,000 gallons | 295,700 gallons |
Magnificent Paint
Sales growth in units will continue to be stagnant.
The more recent years are more representative of continuing unit sales than years in the past.
Exponential smoothing will be an appropriate unit sales projection to use.
Marvelous Paint
Unit sales growth will continue on its current increasing trend.
An exponential growth function, with the year being the independent variable and the sales volume being the dependent variable, will be an appropriate sales projection method.
2019 Direct Material and Inventory Budget Information
The production department worked in conjunction with both the sales and purchasing departments in developing the desired projected inventory levels for December 31, 2019. Information regarding beginning and desired ending inventories for 2019 are as follows.
Beginning Inventory | Ending Inventory | |
---|---|---|
Cans | 59,140 | 62,170 |
Pigment for Magnificent Paint | 64,300 pounds | 72,000 pounds |
Pigment for Marvelous Paint | 50,400 pounds | 55,700 pounds |
Finished Goods Inventory: Magnificent Paint | 33,500 gallons | 36,000 gallons |
Finished Goods Inventory: Marvelous Paint | 25,890 gallons | 29,000 gallons |
The following direct material price increases are expected to occur on January 1, 2019, and remain effective for the entire year.
Item | Price Increase Expected |
---|---|
Cans | $0.03 price increase |
Pigments: Magnificent Paint | $0.15 price increase over 2018 prices |
Pigments: Marvelous Paint | $0.20 price increase over 2018 prices |
Inventories are accounted for using the FIFO method.
Hint!
Remember that each gallon of paint requires 2 lb of pigment.
2019 Direct Labor Budget Information
During 2019, a new contract was signed with the union. As part of that agreement, no worker can work in more than one department, and no single worker can work over 2,000 hours during the year. This means that for every 2,000 hours of labor that is required for production in each department, one hourly employee is needed. For example, if a department needs 10,150 labor hours during the year, six employees will be needed (10,150 / 2,000 per employee = 5.075, which needs to be rounded to six employees).
The standard direct labor rate will increase $0.25 per hour over the 2018 rate.
Additional information regarding employee benefits is included in the section on manufacturing overhead.
2019 Overhead Budget Information
The following information is available regarding the actual overhead costs incurred for 2018.
Variable Costs | Fixed Costs | |
---|---|---|
Indirect materials | $.25 per gallon | |
Indirect labor annual rate | $55,000 per supervisor | |
Hourly employee fringe benefits | 25% of wages | |
Hourly health benefits | $2,000 per employee | |
Supervisor's fringe benefits | 25% supervisor's salaries | |
Supervisor's health benefits | $2,000 per employee | |
Utilities | $.45 per machine hour | |
Maintenance | $.25 per machine hour | $12,000 annually |
Insurance | $50,000 annually | |
Property taxes | $12,000 annually | |
Supplies | $6,000 annually | |
Depreciated (Items held during 2018) | $275,000 annually |
Note
Allocations of maintenance, insurance, property taxes, and supplies are allocated to departments based upon production levels in gallons. The 2018 Depreciation allocation to Magnificent Dept. is $150,000 and Marvelous Dept. is $125,000.
It is expected that the following changes will occur during 2019.
Variable Costs | Fixed Costs | |
---|---|---|
Indirect materials | No change | |
Indirect labor annual rate | 3.0% increase | |
Hourly fringe benefits | No change | |
Hourly health benefits | Increase $250/employee | |
Supervisor fringe benefits | No change | |
Supervisor health benefits | Increase $250/employee | |
Utilities | No change | |
Maintenance | Increase $.05 per MHR | Increase $500 annually |
Insurance | Increase $500 annually | |
Property taxes | Increase 8% | |
Suppliers | Increase $300 annually | |
Depreciation (Items held during 2018) | No change | |
Depreciation (Machinery purchased in 2019) | 5-year life |
Note
There will be no salvage value for the equipment purchased in 2019. MHR is Machine Hours.
2019 Sales Department Information
The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a salary plus commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2018, the meal and entertainment expenses were limited to $50 per week per sales representative based upon a 52-week year.)
The following information is available regarding the actual selling costs incurred for 2018.
Variable | Fixed | |
---|---|---|
Commissions | $.40 per gallon sold | |
Salaries | $20,000 per sales representative | |
Fringe Benefits | 25% of commissions | 25% of salaries |
Health Benefits | $1,800 per sales representative | |
Advertising | $10 per 100 gallons sold | |
Meals and Entertainment | $50 per week per representative | |
Depreciation | $8,000 |
It is felt that the company will not need any additional sales representatives for 2019. It is expected that the following changes will occur in 2019.
Variable | Fixed | |
---|---|---|
Commissions | No change | |
Salaries | No change | |
Fringe Benefits | No change | No change |
Health Benefits | Increase $250 per representative | |
Advertising | $12 per 100 gallons sold | |
Meals and Entertainment | $60 per week per representative | |
Depreciation | No change |
2019 Administrative Budget Information
The Administrative Department consists of the president and an office staff of eight who handle the secretarial, purchasing, and accounting duties (total of nine people).
The following information is available regarding the 2018 actual costs.
Variable | Fixed | |
---|---|---|
Salaries | $300,000 annual | |
Fringe Benefits | 20% of salaries | |
Health Benefits | $2,000 per employee | |
Professional Fees | $25,000 annually | |
Office Supplies | $.04 per gallon sold | |
Telephone | $.02 per gallon sold | |
Depreciation | $8,000 annually |
It is felt that the level of the office and administrative staff will be adequate for the coming year. It is expected that the following changes will occur in 2019.
Variable | Fixed | |
---|---|---|
Salaries | Increase 3% annually | |
Fringe Benefits | No change | |
Health Benefits | Increase $250 per employee | |
Professional Fees | Increase of $2,000 | |
Office Supplies | Increase .01 per gallon sold | |
Telephone | Increase .01 per gallon sole | |
Depreciation | No change |
2019 Income Tax Information
The current federal tax rate is 20%. All taxes for the year will be paid by the end of the year, which means there will be no accrued taxes on December 31, 2019.
2019 Accounts Receivable information
It is expected that sales will occur evenly throughout the year and that there will be no cash sales. Seventy-five percent of monthly sales will be collected in the month following the sale, and the remaining 25% will be collected by the end of the second month. No bad debts are anticipated.
2019 Accounts Payable Information
The account represents the purchases for raw materials only. It is expected that purchases will be made evenly throughout the year and that all purchases will be paid for during the month following the purchase.
2019 Wage and Salary Information
The accrued wage account will include all direct labor, indirect labor, sales commissions and salaries, and administrative salaries. All wages are earned evenly throughout the year, and employees are paid twice each month. On December 31, 2019, the accrued wages will include wages representing one full payroll period.
2019 Property Plant and Equipment Information
Property, Plant, and Equipment consist of the following on December 31, 2018.
Property and Plant | $800,000 |
Equipment | $1,155,000 |
Total | $1,955,000 |
Each additional machine that is needed to support the production level expected during 2019 will cost $35,000 and be depreciated over 5 years using the straight-line method. Assume that any equipment purchases are made on the first day of January and are operational throughout the entire year.
No new equipment will be needed for the sales and administrative departments.
2019 Long-Term Debt Information
A long-term debt repayment (principal only) will be made on December 31, 2019 for $275,000. The interest rate charged on the debt balance throughout 2019 will be 8% and will be paid on December 31, 2019.
If an additional machine is purchased, $5,000 will be paid in cash and the remaining $30,000 will be financed at the 8% rate. The same proportion of cash/additional debt will be applied to all additional equipment purchased during 2019. Again, any purchases will be made on January 1, 2019.
Dividend Policy
Paulson Paint, Inc. policy is to pay dividends on the last day of each quarter. The total anticipated dividends for 2019 are $2.75 per share.
Other Information
Unless otherwise noted, information will remain unchanged from 2018 to 2019.
2018 Income Statement and Balance Sheet
Paulson Paint, Inc.
Income Statement
Year Ended December 31, 2018
Sales | $11,482,600 | |
Cost of Goods Sold | $9,192,947 | |
Gross Margin | $2,289,653 | |
Selling Expenses | $603,339 | |
Administrative Expenses | $387,056 | $990,395 |
Operating Income | $1,299,258 | |
Interest Expense | $96,440 | |
Income Before Income Tax | $1,202,818 | |
Income Tax | $240,564 | |
Net Income | $962,254 |
Paulson Paint, Inc.
Balance Sheet
December 31, 2018
Assets | |
Cash | $190,000 |
Accounts Receivable | $857,000 |
Inventory-Raw Materials | $412,000 |
Inventory-Finished Goods | $564,850 |
Plant and Equipment | $1,955,000 |
Less Accumulated Depreciation | ($630,000) |
Total Assets | $3,348,850 |
Liabilities | |
Accounts Payable | $395,620 |
Accrued Wages | $82,500 |
Accrued Other | $71,220 |
Long-Term Debt | $1,230,000 |
Total Liabilities | $1,779,340 |
Stockholders' Equity | |
Common Stock, $5 per value | $450,000 |
Additional Paid-In Capital | $684,430 |
Retained Earnings | $435,080 |
Total Stockholders' Equity | $1,569,510 |
Total Liabilities and Stockholders' Equity | $3,348,850 |
Milestone 1 Criteria
A sales projection in units using the methods suggested
Sales budget
Production budget
Direct materials budget
Direct labor budget
Manufacturing overhead budget
Projected Cost of Goods Manufactured (Absorption Costing)
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