The Neptune International Ltd Strategy Group recently identified an opportunity to purchase a large dairy factory in regional North East Victoria which has virtually shut down as a result of financial problems which have beset its owner Murray Goulburn (see, for example, https://www.abc.net.au/news/2017-05-02/kiewa-devastated-by-murray-goulburn-closure/8489866). Kiewa Milk is located in the small township of Tangambalanga in the picturesque and pristine Kiewa Valley just outside the regional centre of Albury Wodonga. The valley is renowned for its world-leading dairy farms and the high quality milk and milk derivative products the Kiewa Milk factory has produced over a long period of time. The Kiewa factory produces high quality milk and yoghurt varieties and a variety of powdered-milk baby formulae all using the rich and creamy milk sourced from dedicated Kiewa Valley dairy farms.

Neptune International Ltd is planning to purchase the Kiewa Milk business from Murray Goulburn and focus on the production of baby infant formula which will be exported to the burgeoning Chinese market. It is planned that 100% of production will be sold through the ChinaSouth Dairy Co which is a wholly-owned subsidiary of Neptune with offices in Hong Kong and Guangzhou.

You have been asked to develop a comprehensive production and manufacturing income budget for the next calendar year (2019 inclusive). Your budget will be based on historical data provided by Kiewa Milk combined with future sales and cost estimates provided by the Neptune Strategy Group. Because of the current low production base of Kiewa Milk's Infant Formula it is expected that unit sales will increase at 30% as the product is launched into the Chinese export market.

The budget should include a sales budget, production budget, purchases budget and include a schedule of cost of goods manufactured, a schedule of cost of goods sold, and gross profit calculation.There is no need to produce a budgeted income statement.

Kiewa Milk 2018 Financial Information

Units

$

Sales

24,525,000 61,312,500

Wholesale Price (per unit)

2.50

Raw Material Cost (per unit)

0.6250

Direct labour (per unit)

0.0500

Variable Manufacturing Overhead (per unit)

1.6000

Factory Fixed Costs (per annum)

5,000,000

Inventory 30/06/2018

Closing Inventory Raw Materials 950,000

590,000

Closing Finished Goods Inventory 938,000

2,500,000

Other Expenses (2018 Budget Estimates)

Administration Wages & Salaries

750,000

General Administrative Expenses

500,000

Factory Manager Salary (including on-costs)

200,000

Non-manufacturing Utilities Costs

67,000

Depreciation: Office Equipment (Straight line)

5,000

2019 - Budget assumptions:

Unit Sales are expected to increase at 30% per annum

Selling Price is expected to increase at 3%abovethe inflation rate

Raw Material and Manufacturing Overhead costs (incorporating power costs) are budgeted to increase at 1% above the inflation rate

To ensure quality supply and to overcome issues of dairy farm viability Neptune plan to provide a 5 cents ($0.05) per unit direct rebate to dairy farmers based on quantity of milk provided to Neptune. This rebate will be production based and will not increase with inflation over the budget period.

Labour cost increases including management salaries are expected to be held at the rate of inflation

The Australian Company tax rate is predicted to remain at 30%

Factory Fixed Cost manufacturing expenditure will not change over the budget period.

Target Raw Material Inventory is equivalent of 2 weeks of expected production for the year.

Target Finished Goods Inventory is the equivalent of 2 weeks of the expected sales for the year

The current production capacity of the Kiewa baby formula factory is est. to be 50 million units pa. (this is more than double its current production).

The long range inflation forecast for Australia is 2.00% pa.

Required:

(a)2019 Budget

i.Sales, Production and Purchases budget

ii.Budgeted schedule of Cost of Goods Manufactured (COGM)

iii.Budgeted schedule of Cost of Goods Sold (COGS) and Gross Profit calculation