Problem 10-1 (Part Level Submission)

The results of operations for the Preston Manufacturing Company for the fourth quarter of 2014 were as follows:

Sales

$520,000

Less variable cost of sales

312,000

Contribution margin

208,000

Less fixed production costs

$104,000

Less fixed selling and administrative expenses

52,000156,000

Income before taxes

52,000

Less taxes on income

20,800

Net income

$31,200

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 2014 was as follows:

Assets:

Cash

$185,000

Accounts receivable

260,000

Inventory

362,000

Total current assets

807,000

Property, plant, and equipment

450,000

Less accumulated depreciation

132,000

Total assets

$1,125,000

Liabilities and owners equity:

Accounts payable

$74,880

Common stock

533,000

Retained earnings

517,120

Total liabilities and owners equity$1,125,000

Additional information:

1.Sales and variable costs of sales are expected to increase by 10 percent in the next quarter.

2.All sales are on credit with 50 percent collected in the quarter of sale and 50 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. 40 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 $8,000 of depreciation expense) are expected to increase by 1 percent. Fixed production costs requiring payment are paid in the quarter they are incurred.

5.Fixed selling and administrative costs (other than $9,000 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 2015.

(a)

Prepare a budgeted income statement for the first quarter of 2015.

(b)

Prepare a cash budget for the first quarter of 2015.

(c)

Prepare a budget balance sheet as of the end of the first quarter of 2015.