Question A

Cash Budget Problem

The Teletron Corporation manufactures different types of printers for personal computers. The company is planning its cash needs for the first quarter of 2006. In the past, Teletron has had to borrow money during the first quarter since sales peak during this period of time. It would like to be aware of any potential cash shortages before they occur.

The Controller asks you, the Senior Budgeting Accountant, to prepare a Cash budget for January, February, and March 2006 for the entire company. Today is December 1, 2005 and you have just met with other employees from the Purchasing, Production, Marketing, and Finance departments. From this meeting you compiled the following table of information (all based on estimates).

	2005	2005	2006	2006	2006
	Nov	Dec	Jan	Feb	Mar
Raw Materials Purchases	$ 20,000	$ 25,000	$ 25,000	$ 20,000	$ 25,000
Direct Labor Hours	1,600 hrs	1,760 hrs	1,760 hrs	2,240 hrs	1,760 hrs
Factory Overhead Costs	$ 4,000	$ 4,000	$ 4,000	$ 4,000	$ 4,000
Selling & Administrative Expenses	$ 10,000	$ 12,000	$ 12,000	$ 10,000	$ 12,000
Sales to customers	$ 100,000	$ 110,000	$ 120,000	$ 110,000	$ 100,000

Monthly sales to clients are expected to be collected as follows: 60% in the first month following the sale; 30% in the second month following the sale; and 10% in the third month following the sale. Note that October 2005 sales to customers totaled $ 90,000.

Raw Material Purchases are expected to be paid as follows: 50% in the month of the purchase; 50% in the following month.

The production workers make $ 25 per hour. There is no overtime and all wages are paid in the month they are incurred.

Factory Overhead Costs are paid in the month following the month they are incurred.

Selling & Administrative Expenses are paid in the month in the month they are incurred.

Teletron plans on borrowing $ 100,000 from its bank and will receive the money on January 1, 2006. The loan is due to be paid back in 2008 in a lump sum payment. The yearly interest rate will be 12% and interest will be paid each month (assume the same interest expense each month regardless of the number of days in each month).

Teletron plans on making two $ 75,000 federal income tax payments during 2006 %u2013 one in January 2006 and the other one in June 2006.

Teletron plans on paying $ 200,000 cash for the purchase of new production machinery in February 2006.

Teletron plans on issuing (selling) 30,000 new shares of common stock in March 2006. The sales price is expected to be $ 25 per share.

Teletron expects its cash balance on December 31, 2005 to be $ 45,000.

(continued on back)

Requirements:

1. Prepare a cash budget for Teletron for each month of the first quarter 2006 (i.e. January, February, and March 2006).

2. Comment on whether the ending cash balances each month are adequate for Teletron%u2019s cash needs and what Teletron might do in a month where the estimated cash balance is negative.

Question B

Cost-Volume-Profit Analysis Problem

The Salazar Corporation manufactures only one product %u2013 a medium-size, high-quality paper shredder called the MS-100. In an effort to better understand cost behavior, Salazar%u2019s accounting department has identified its costs as either variable or fixed.

Salazar%u2019s Management wants to perform Cost-Volume-Profit (CVP) analysis to evaluate three different scenarios it is considering for the year 2012. Under the current production process (Scenario 1), variable costs are $ 90 per unit and fixed costs are $ 420,000 per year. The sales price for the MS-100 is $150 per unit and the number of units to be sold in 2012 is 20,000 units.

Scenarios

1. Leave the current production process as it is - make no changes.

2. Purchase machinery that will decrease variable costs by $ 30 per unit will but increase yearly fixed costs by $ 390,000

3. Purchase machinery that will decrease variable costs by $ 15 per unit but will increase yearly fixed costs by $ 255,000.

Requirements:

a) Calculate the contribution margin per unit and the contribution margin ratio for each of the three scenarios. Show your calculations.

b) Calculate the breakeven point in units and dollars - only for Scenario I, the current production process. Show your calculations.

c) Prepare a contribution margin income statement for each of the three scenarios.

d) Which of the three scenarios provides the highest net income for the Salazar Company?

Salazar%u2019s management subsequently makes a decision that the company must make

$ 918,000 of after-tax net income in 2012, otherwise certain investors might decide to sell their ownership interest.

e) Calculate the sales that Salazar must make in order to produce an after-tax net income of $ 918,000 (both in total sales dollars and in total sales units). This calculation should be based on the scenario in d) that provides that highest net income. Salazar%u2019s income tax rate is 20%. Show your calculations.

f) Prepare a forecasted contribution margin income statement that shows the results for the sales level computed in part e) above.