Question
The Grady Tire Company manufactures racing tires for bicycles. Grady sells tires for $80 each. Grady is planning for the next year by developing a
The
Grady
Tire Company manufactures racing tires for bicycles.
Grady
sells tires for
$80
each.
Grady
is planning for the next year by developing a master budget by quarters.
Grady's
balance sheet for
December
31,
2024,
follows:
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Part 1
Other data for
Grady
Tire Company:
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.
nless otherwise noted, assume all of the following events occurred during
2024
and that any balances given are stated as of
December
31,
2024.)
a. | Budgeted sales are 1,600 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 40% of total sales, with the remaining 60% of sales on account. |
b. | Finished Goods Inventory on December 31, 2024 consists of 600 tires at $26 each. |
c. | Desired ending Finished Goods Inventory is 30% of the next quarter's sales; first quarter sales for 2026 are expected be 2,400 tires. FIFO inventory costing method is used. |
d. | Raw Materials Inventory on December 31, 2024, consists of 1,200 pounds of rubber compound used to manufacture the tires. |
e. | Direct materials requirements are two pounds of a rubber compound per tire. The cost of the compound is $5.50 per pound. |
f. | Desired ending Raw Materials Inventory is 50% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2025 is 1,200 pounds; indirect materials are insignificant and not considered for budgeting purposes. |
g. | Each tire requires 0.70 hours of direct labor; direct labor costs average $25 per hour. |
h. | Variable manufacturing overhead is $3 per tire. |
i. | Fixed manufacturing overhead includes $3,000 per quarter in depreciation and $42,548 per quarter for other costs, such as utilities, insurance, and property taxes. |
j. | Fixed selling and administrative expenses include $7,500 per quarter for salaries; $2,400 per quarter for rent; $1,800 per quarter for insurance; and $2,000 per quarter for depreciation. |
k. | Variable selling and administrative expenses include supplies at 1% of sales. |
l. | Capital expenditures include $40,000 for new manufacturing equipment, to be purchased and paid in the first quarter. |
m. | Cash receipts for sales on account are 80% in the quarter of the sale and 20% in the quarter following the sale; December 31, 2024, Accounts Receivable is received in the first quarter of 2025; uncollectible accounts are considered insignificant and not considered for budgeting purposes. |
n. | Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2024, Accounts Payable is paid in the first quarter of 2025. |
o. | Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. |
p. | Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred. |
q. | Grady desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter |
Grady Tire Company | ||
Balance Sheet | ||
December 31, 2024 | ||
Assets | ||
Current Assets: |
|
|
Cash | $35,000 |
|
Accounts Receivable | 40,000 |
|
Raw Materials Inventory | 6,600 |
|
Finished Goods Inventory | 15,600 |
|
Total Current Assets |
| $97,200 |
Property, Plant, and Equipment: |
|
|
Equipment | 150,000 |
|
Less: Accumulated Depreciation | (106,000) | 44,000 |
Total Assets |
| $141,200 |
Liabilities | ||
Current Liabilities: |
|
|
Accounts Payable |
| $11,000 |
Stockholders' Equity | ||
Common Stock, no par | $100,000 |
|
Retained Earnings | 30,200 |
|
Total Stockholders' Equity |
| 130,200 |
Total Liabilities and Stockholders' Equity |
| $141,200 |
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