The Grayson Tire Company manufactures racing tires for bicycles. Grayson sells tires for $65 each. Grayson is planning for the next year by developing a master budget by quarters. Grayson's balance sheet for December 31, 2018, follows:

Grayson Tire Company
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash	$42,000
Accounts Receivable	22,000
Raw Materials Inventory	6,000
Finished Goods Inventory	19,200
Total Current Assets		$89,200
Property, Plant, and Equipment:
Equipment	142,000
Less: Accumulated Depreciation	(77,000)	65,000
Total Assets		$154,200
Liabilities
Current Liabilities:
Accounts Payable		$15,000
Stockholders' Equity
Common Stock, no par	$130,000
Retained Earnings	9,200
Total Stockholders' Equity		139,200
Total Liabilities and Stockholders' Equity		$154,200

Other data for Grayson Tire Company:

a. Budgeted sales are 1,600 tires for the first quarter and expected to increase by 100 tires per quarter. Cash sales are expected to be 20% of total sales, with the remaining 80% of sales on account.

b. Finished Goods Inventory on December 31, 2018 consists of 600 tires at $32 each.

c. Desired ending Finished Goods Inventory is 50% of the next quarter's sales; first quarter sales for 2020 are expected to be 2,000 tires. FIFO inventory costing method is used.

d. Raw Materials Inventory on December 31, 2018, consists of 1,200 pounds of rubber compound used to manufacture the tires.

e. Direct materials requirements are 2 pounds of rubber compound per tire. The cost of the compound is $5.00 per pound.

f. Desired ending Raw Materials Inventory is 20% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2019, is 1200 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 $20 per hour.

h. Variable manufacturing overhead is $5 per tire.

i. Fixed manufacturing overhead includes $5,500 per quarter in depreciation and $17,625 per quarter for other costs, such as utilities, insurance, and property taxes.

j. Fixed selling and administrative expenses include $14,000 per quarter for salaries; $4,800 per quarter for rent; $1,500 per quarter for insurance; and $1,500 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 3% of sales.

L. Capital expenditures include $10,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

m. Cash receipts for sales on account are 75% in the quarter of the sale and 25% in the quarter following the sale; December 31,2018, Accounts Receivable is received in the first quarter of 2019; uncollectible amounts are considered insignificant and not considered for budgeting purposes.

n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019.

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. Grayson desires to maintain a minimum cash balance of $40,000 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 10% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

REQUIREMENTS:

1. Prepare Grayson's operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Grayson's annual financial budget for 2019, including budgeted income statement and budgeted financial sheet.