SooilTech, Inc., manufactures a special ceramic tile used as a component in residential solar
energy systems. Sales are seasonal due to the seasonality in the home-building industry.
The expected pattern of sales for the next year (20x8) is as follows:

Each tile sells for $25. All sales are on account, and SooilTech’s experience with cash99
collections is that 60 percent of each quarter’s sales are collected during the same quarter as
the sale. The remaining 40 percent of sales is collected in the quarter after the sale. SooilTech
experiences negligible bad debts, and so this is ignored in the budgeting process. Sales in the
fourth quarter of 20x7 are expected to be $100,000 (4,000 units).

Quarter	1st	2nd	3rd	4th	Year
Sales in units	2000	6000	8000	4000	20000

SooilTech desires to have 10 percent of the following quarter’s sales needs in finished-goods
inventory at the end of each quarter. (On December 31, 20x7, SolarTech expects to have 200
units in inventory.)
Each tile requires two pounds of raw material. SooilTech desires to have 10 percent of the
next quarter’s raw material in inventory at the end of each quarter. (On December 31, 20x7,
SolarTech expects to have 480 pounds of raw material in inventory.)
The raw material price is $5 per pound. The company buys its raw material on account and
pays 70 percent of the resulting accounts payable during the quarter of the purchase. The
remaining 30 percent is paid during the following quarter. (The raw-material purchases in the
fourth quarter of 20x7 are expected to be $36,600.)

Selling and administrative expenses are budgeted at $20,000 for each quarter. Of this
amount, $5,000 is for depreciation computed under straight-line method.

A new web server for the Marketing Department costing $6,000 will be purchased for
cash during July, and dividends totalling $9,000 will be paid during December.

Cash balance at the beginning of 20X8 will be $10,000. The company must maintain a minimum cash balance of $5,000 at the end of each quarter. An open line of credit is available from the company’s bank to bolster the cash position as needed.

Required:
Prepare the following budget schedules for 20x8. Include a column for each quarter
and for the year.

1. Sales budget (in units and dollars).

2. Production budget. (Hint: 1st quarter of the next year, 20x9, which is predicted to be 2,000 units)

Examine the production budget that you prepared in Requirement 2 above. Why will the
company produce more units than it sells in the first and the second quarter, and fewer units than it sells in the third and fourth quarter? (maximum 100 words)

3. Direct material budget. (Hint: The desired ending inventory in the fourth quarter is 480 pounds.) (1.5 point)

4. Cash receipts budget.

5. Cash disbursements budget

6. Cash budget for 20X8. Indicate in the financing section any borrowing that will be needed during the quarter.