Question

After preparing the budget for the second quarter based on the parameters in Case 5-38, Kim Klandon was not satisfied with the projected results and began to investigate the following alternatives. Each of the alternatives is independent of all others.
a. Reducing the price of a bag of rocks to $9.70 and spending an additional $1,000 per month on advertising are expected to increase sales volume by 10 percent each month.
(March sales price and unit sales will not change. Continue using a $2.00 per unit applied overhead rate.)
b. Klandon can switch to a new supplier that has promised to provide raw materials at a price of $0.32 per pound. These rocks are a lesser quality than those provided by the current supplier. As a result, it will take 6 pounds of raw materials for each bag of fi nished rocks. Klandon will also need to maintain ending Raw Materials Inventory equal to 15 percent of the following month's production needs.
c. Klandon's current supplier has offered to provide a higher quality rock for $0.50 per pound. If the higher quality rock is used, only 4 pounds will be needed for each bag of fi nished rocks. As a result, Klandon will only need to maintain ending Raw Materials Inventory of 8 percent of the following month's production needs.
d. Klandon would like to reduce the age of accounts receivable to better manage the cash cycle. Instead of charging a fee for accounts that are paid in the second month after sale, she wants to offer a 2 percent cash discount. Since the company cannot afford for total revenue to decrease, Klandon plans to increase the sales price to
$10.20 per bag. Customers who pay with cash at the time of purchase won't see any increase in their costs, but customers who purchase on account and pay later will.
Klandon anticipates the following collection pattern if such a change is made:
Cash sales......... 75%
Credit:
Month of sale...... 10%
Month after sale..... 10%
Uncollectible......... 5%
............ 100%

Required

Use your solution to 5-38 to answer the following questions for each of the alternatives:
• What budgets were impacted by the new information in the alternative?
• By how much did income change from the amount in the original budget of 5-38?
• What balance sheet accounts changed from the amounts in the original budget of 5-38? What caused the changes?
• What is your recommendation about pursuing the alternative? Why?



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  • CreatedFebruary 21, 2014
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