Problem 1

Master Budget The results of operations for the Preston Manufacturing Company for the fourth quarter of 2017 were as follows:

Sales $484,000

Less Variable cost of sales 292,000

Contribution Margin 192,000

Less fixed production costs $104,000

Less fixed selling and administrative exp 48,000 152,000

Income before taxes 40,000

Less taxes on income 16,000

Net income $24,000

Note: Preston Manufacturing uses the variable costing method. Thus, only variable production costs are included in inventory and cost of goods sold. Fixed production costs are charged to expense in the period incurred.

The companys balance sheet as of the end of the fourth quarter of 2017 was as follows:

Assets:

Cash $140,000

Accounts receivable 192,000

Inventory 340,000

Total current assets 672,000

Property, plant, and equipment 388,000

Less accumulated depreciation 96,000

Total Assets $964,000

Liabilities and owners equity

Accounts Payable $56,800

Common Stock 476,000

Retained Stock 431,200

Total liabilities and owners equity $964,000

Additional information

1. Sales and variable costs of sales are expected to increase by 12 percent in the next quarter.

2. All sales are on credit with 60 percent collected in the quarter of sales and 40 percent collected in the following quarter.

3. Variable costs of sales consist of 40 percent materials. 40 percent direct labor, and 20 percent variable overhead. Materials are purchased on credit. Fifty percent are paid for in the quarter of purchase, and the remaining amount is paid in the quarter after purchase. The inventory balance is not expected to change. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred.

4. Fixed production costs( other than $7,000 of depreciation expense) are expected to increase by 3 percent. Fixed production costs requiring payment are paid in the quarter they are incurred.

5. Fixed selling and administrative costs( other than $5,000 of depreciation expense) are expected to increase by 2 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred.

6. The tax rate is expected to be 20 percent. All taxes are paid in the quarter they incurred.

7. No purchase of property, plant, or equipment are expected in the first quarter of 2018.

Required

A. Prepare a budgeted income statement for the first quarter of 2018

B. Prepare a cash budget for the first quarter of 2018.

C. Prepare a budgeted balance sheet as of the end of the first quarter of 2018.