PROBLEM 10-1. Master Budget

The results of operations for the Preston Manufacturing Company for the fourth quarter of

2017 were as follows:

Sales $550,000

Less variable cost of sales $330,000

Contribution margin $220,000

Less fixed production costs $120,000

Less fixed selling & adm expenses $55,000 $175,000

Income before taxes $45,000

less taxes on income $18,000

Net income $27,000

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 company's balance sheet as of the end of the fourth quarter of 2017 was as follows:

Balance Sheet fourth quarter of 2017

Assets

Cash

$160,000

Accounts receivable

$220,000

Inventory

$385,000

Total current assets

$765,000

Property, plant and equipment

$440,000

Less accumulated depreciation

$110,000

Total assets

$1,095,000

Liabilities and owner's equity:

Accounts Payable

$66,000

Common stock

$540,000

Retained earnings

$489,000

Total liabilities and owner's equity

$1,095,000

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 sale and 40 percent collected in the following quarter.

3. Variable cost of sales consists 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 for 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 $9,000 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 $7,000 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 40 percent. All taxes are paid in the quarter they are incurred.

7. No purchases 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.