Question 1: (24 marks)

Tonka toys manufactures a toy truck called Big Red that they distribute to retailers. The company is now planning for the third quarter of 2020. In order to keep production and shipments moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 30 percent of the next months sales. The finished goods inventory on June 30 is budgeted to be 17,000 units.

2. Big Red, requires three kilograms of plastic to make. The raw material inventory on hand at the end of each month must be equal to one half of the following months production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 64,500 kilograms. One kilogram of plastic can be purchased for $0.15.

3. The company maintains no work in process inventory.

4. The Big Red Truck sells for $35.00 per unit. Forecasted unit sales for Big Red for the last nine months of 2020 is given below:

Budgeted Sales (units)

April 30,000

May 35,000

June 39,000

July 40,000

August 50,000

September 70,000

October 35,000

November 20,000

December 10,000

5. Fifteen percent of Big Red Truck sales are on a cash basis whereas the remaining eighty-five percent are on credit. History has shown the following collection pattern for credit sales:

30% are collected in the month of sale

40 % are collected in the month following the sale

20 % are collected two months after the sale

5% are collected three months after the sale

The remaining 5% are bad debts.

Required:

1. Prepare a production budget for Big Red for the third quarter of the year. Make sure you show each month separately as well as a total column for the third quarter.

2. Prepare a raw material purchase budget for the third quarter of the year. Make sure you show each month separately as well as a total column for the third quarter.

3. Prepare a schedule showing the cash collections resulting from credit sales. Make sure you show each month separately as well as a total column for the third quarter.