Question
Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company's bank late in the current year
Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company's bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.
Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:
a.Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year,are:
b.The company normally collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year's fourth-quarter actualdata.
c.
Eighty percent of a quarter's merchandise purchases are paid for within thequarter. The remainder is paid for in the followingquarter.
d.Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter isdepreciation.
e.The company will pay $10,000 in dividends eachquarter.
f.Land purchases of $75,000 will be made in the second quarter, and purchasesof
$48,000 will be made in the third quarter. These purchases will be for cash.
g.The Cash account contained $10,000 at the end of the current year. The treasurerfeels that this represents a minimum balance that must bemaintained.
h.The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each quarter, up to a total loan balanceof
$100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year.
i.At present, the company has no loansoutstanding.
Required:
1.Prepare the following by quarter and in total for nextyear:
a.A schedule of expected cashcollections.
b.A schedule of expected cash disbursements for merchandisepurchases.
2.Compute the expected cash disbursements for selling and administrative expenses, by quarter and in total, for nextyear.
3.Prepare cash budget, by quarter and in total, for nextyear.
4.Why do companies do Budget? What are the problems a company might experience ifit disregards the budgetingprocedures?
5."The principal purpose of the cash budget is to see how much cash the company will have in the bank at the end of the year." Do you agree?Explain.
Trump Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:
Capital-intensive
Labor-intensive
Variable manufacturing cost per unit
$ 14.00
$ 17.60
Fixed manufacturing cost per year
$ 2,440,000
$1,320,000
The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.
Required:
a.Calculate the break-even point in units if Trump Corporation usesthe:
1.Capital-intensive manufacturingmethod.
2.Labor-intensive manufacturingmethod.
b.Determine the unit sales volume at which the net operating income is the same forthe two manufacturingmethods.
c.Assuming sales of 250,000 units, what is the degree of operating leverage ifthe company usesthe:
1.Capital-intensive manufacturingmethod.
2.Labor-intensive manufacturingmethod.
d.What is your recommendation to management concerning which manufacturingmethod should be used? Andwhy?
e.In all respects, Company A and Company B are identical except that Company A'scosts are mostly variable, whereas Company B's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits?Explain.
Bulan Inc. makes a range of products. The company's predetermined overhead rate is
$20 per direct labor-hour, which was calculated using the following budgeted data:
Variablemanufacturingoverhead................ $140,000
Fixedmanufacturingoverhead..................... $560,000
Directlabor-hours......................................... 35,000
Component T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows:
Directmaterials.............................................. $ 45.00
Directlabor.................................................... 32.00
Manufacturingoverheadapplied.................... 40.00
Unitproductcost............................................ $117.00
An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity.
Required:
a.Is the offer from the outside supplier financially attractive?Why?
b.What are the probable reasons for a company to buy inputs from outsiders even though "making" is cheaper tothem?
c.What are the probable reasons for a company to make their inputs even though "buying from outside supplier" is cheaper tothem?
Pacific Decor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well-received by
Jose Alvarez, the product development manager. However, Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific's cost accountant, presents Alvarez with the following cost data for the expected production of 200 tables:
Design cost
$ 5,000
Direct materials
120,000
Direct manufacturing labor
142,000
Variable manufacturing overhead
64,000
Fixed manufacturing overhead
46,500
Marketing
15,000
1.Alvarez thinks that Pacific can successfully market the table for $2,000. The company's target operating income is 10% of revenue. Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Hoover meet Pacific's requirements? Is value engineeringneeded?
2.Alvarez discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table's size by two inches will lower the cost of direct materials by 40%. However, the redesign will require an additional $6,000 of design cost, and the table will be sold for $1,950. Will this design change allow the table to meet its target cost? Are the costs ofmaterials a locked-in cost?
3.Li insists that the two inches are an absolute necessity in terms of the table's design. She believes that spending an additional $7,000 on better marketing will allow Pacific to sell the tables for $2,200. If this is the case, will the table's target cost be achieved without any valueengineering?
4.Compare the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do, based solely on your calculations? Explain briefly.
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