Rainy Day Company

The Business Situation

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances Administrative salaries $11,250 Advertising 15,250 Cash, April 1 0 Depreciation on factory building 1,500 Depreciation on office equipment 800 Insurance on factory building 1,500 Miscellaneous expensesfactory 1,000 Office supplies expense 300 Professional fees 500 Property taxes on factory building 400 Raw materials used 70,000 Rent on production equipment 6,000 Research and development 10,000 Sales commissions 40,000 Utility costsfactory 900 Wagesfactory 70,000 Work in process, April 1 0 Work in process, April 30 0 Raw materials inventory, April 1 0 Raw materials inventory, April 30 0 Raw material purchases 70,000 Finished goods inventory, April 1 0

Production and Sales Data Number of umbrellas produced 10,000 Expected sales in units for April ($40 unit sales price) 8,000 Expected sales in units for May 10,000 Desired ending inventory 20% of next months sales Direct materials per finished unit 1 kilogram Direct materials cost $7 per kilogram Direct labor hours per unit .35 Direct labor hourly rate $20

Cash Flow Data Cash collections from customers: 75% in month of sale and 25% the following month. Cash payments to suppliers: 75% in month of purchase and 25% the following month. Income tax rate: 45%. Cost of proposed production equipment: $720,000. Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Instructions Using all the data presented above, do the following.

11. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000-unit increments.

12. Identify one potential cause of direct materials, direct labor, and manufacturing overhead variances in the production of the umbrella.

13. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget (requirement 10f).

10f. is the attached photo 92 F. 93 94 95 196 197 198 199 Cash Budget For the month ended April 30, 2020 Beginning cash balance $ Add: Cash receipts $ 240,000 Total cash available $ 240,000 Less: Cash disbursements for purchase of direct materials $ 52,500 Direct labor $ 70,000 Manufacturing overhead $ 11,300 Selling and administrative expense S 78,100 Purchase of equipment S 720,000 Income taxes $ 108,000 Total cash disbursements $ 1,039,900 Cash surplus (deficiency) S (799,900) Borrowing $ 829,900 $ 829,900 Ending cash balance $ 30,000 200 201 202 203 204 205 206 207