You are the new Controller of Frame-It Company; they are a manufacturer of metal picture frames. Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with the entire senior staff (which includes you). It was November of 2023, and the assembled group was discussing preparation of the firm's master budget for 2024. Vaughn declared - "We have reached our limits in producing frames the way we currently have been doing things, so I've decided to go ahead and purchase the industrial robot we've been talking about. We'll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment. I have every expectation that this new equipment can help us meet the demands from our customers and bring us to new heights of performance and grow our 2024 net income by at least 12%!!!" In response to a question about financing the acquisition, Vaughn replied as follows: "The robot will cost $1,000,000. We'll finance it with a one-year $1,000,000 loan from Shark Bank and Trust Company. I've negotiated a principal repayment schedule of four equal installments on the last day of each quarter. The annual interest rate will be 10% of the outstanding balance at the beginning of the quarter, and interest payments will be paid quarterly as well." With that the meeting broke up, and the budget process was on. The firm's two product lines are designated as S (small frames; 5 x 7 inches) and L (large frames; 8 x 10 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Each S frame requires a 2-foot metal strip; an L frame requires a 3-foot strip. Allowing for normal breakage and scrap glass, Frame-It can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. As Controller your first assignment places you in charge of preparing the master budget for 2024. You have gathered the following information as part of your preparation of the master budget: 1. Sales in the fourth quarter of 2023 are expected to be 50,000 S frames and 40,000 L frames. With this enhanced production, the sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 2024 are expected to be 55,000 units. 2. Frame-It's sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company's collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the following quarter. (For simplicity, assume the company can collect 100 percent of its accounts receivable over time.) 3. For 2024 planning purposes, the sales price of the S frame will be $10.25, with the L frame selling for $16. These prices are expected to hold constant throughout 2024. 4. Frame-It's production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 25 percent of the following quarter's sales. At December 31, 2023 the finished-goods inventory of S Frames and L Frames was estimated at 11,000 and 9,000 units respectively. 5. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarter's production. Based on that assumption, it was estimated that there would be 7,400 glass sheets in raw materials inventory at December 31, 2023. Because metal strips are purchased locally, Frame-It buys them on a just-in-time basis; inventory is negligible so there is no requirement to have any additional quantity on hand to begin the next quarter's production. 6. All of Frame-It's direct-material purchases are made on account, and 70 percent of each quarter's purchases are paid in cash during the same quarter as the purchase. The other 30 percent is paid in the next quarter. 7. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is not material and will not be addressed in the preparation of the 2024 budget. 8. Projected production costs in 2024 are as follows: Direct material: Metal strips: S Frame: 2 feet @ $1 per foot L Frame: 3 feet @ $1 per foot Glass sheets: S Frame: sheet @ $8 per sheet L Frame: sheet @ $8 per sheet Direct labor: S Frame: 0.1 hour @ $20 per hour L Frame: 0.15 hour @ $20 per hour Applied Overhead: SFrame L Frame $2 $3 3 S Frame: 0.1 hour @ $10 per hour L Frame: 0.15 hour @ $10 per hour Total production cost per unit 1 1.50 $7 $11.50 + 9. The following production overhead costs are budgeted for 2024: Indirect material @$0.96 direct labor hr. Indirect labor @$2.70 direct labor hr. Other fixed overhead Depreciation (straight-line) Total overhead Q1 02 03 Q4 $12,648 $13,260 $14,460 $ 15,660 Total 2024 $ 56,028 35,573 37,294 40,669 44,044 157,579 35,000 40,000 45,000 50,000 170,000 50,000 50,000 50,000 50,000 100,000 $ 133,221 $140,554 $ 150,129 $159,704 $583,607 10. For budgeting purposes, estimated Income Taxes Payable at the end of 2023 will be paid on 3/15/24 in their entirety. No other quarterly estimated payments will be made. Income Tax Expense will be computed at 30% for the purpose of creating an estimated Income Statement for the year ended 12/31/24. 11. A commission of $0.20 is paid on sales of each type of frame. Additionally, Frame-It's fixed selling and administrative expenses are $77,000 per quarter. All selling and administrative expenses are paid in cash in the quarter. 12. As you prepare the cash budget, Vaughn informs you that dividends of $50,000 will be declared and paid in cash each quarter. 13. Frame-It's projected balance sheet as of December 31, 2023, follows: Cash Accounts receivable Inventory: Raw material Finished goods Plant & equipment (net of accumulated depreciation) Total assets Accounts payable Income Taxes Payable (2023 Liability) Common stock Retained earnings Total liabilities and stockholders' equity $459,800 132,000 59,200 167,000 8,000,000 $ 8,818,000 $ 99,400 364,800 5,000,000 3,353,800 $ 8,818,000