Alternative Budget In a recent meeting, the buyer indicated a possibility of a large special order of
Question:
Alternative Budget In a recent meeting, the buyer indicated a possibility of a large special order of 100,000 units of Z350 for $35 per unit. The special order is to be delivered in Q4 2022. Lambda Inc., considering fulfilling some of the special orders, estimates that the unused capacity for 500 units will be available in Q4 2022. Prepare a master budget under a scenario of accepting the special order.
Item 1. Annual Manufacturing Contract
Lambda Inc. is a contract manufacturer of consumer electronics. Lambda Inc. supplies a
component (Z350) to its major buyer under an annual contract. As of the first quarter of 2022,
the annual contract specifies the volume, selling price, and the timing of the delivery from April
2022 to March 2023. The scheduled delivery of Z350 in units for each quarter is the following:
2022 Q2 4,500
2022 Q3 3,500
2022 Q4 8,500
2023 Q1 2,500
The contracted selling price is $45.00 per unit. All sales are on account. Lambda Inc. expects to
collect the cash payments in six months for each quarterly delivery of Z350.
Item 2. Direct Materials Requirements and Purchasing Policy
Each unit of Z350 requires two materials: a PCB module and 3 grams of TPU 95A. Lambda Inc.
purchases the PCB for $12 per unit and TPU 95A for $0.2/gram.
Lambda Inc. purchases all raw materials on account. Lambda Inc. pays 60% of a quarter’s
purchases in cash during the quarter of purchase and the rest in the next quarter.
Item 3. Inventory Stock and Policy
At the beginning of Q2 2022, Lambda expects to have 1,900 PCBs and 7,500 grams of TPU 95A
in inventory. Assume constant material purchasing prices and inventory values for the purpose of
budgeting.
The manufacturing process follows a short cycle of assembly completed within a day, and
therefore there are no work in progress inventories.
Lambda Inc. has a policy of keeping a desired ending inventory of 12% of next quarter’s sales in
finished goods inventory and a desired ending inventory of 10% of next quarter’s production
needs for direct materials.
Lambda Inc. expects the contracted sales for Q2 and Q3 of the year 2023 would be identical to
the previous year.
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Item 4. Direct Labour
The completion requires 0.5 hours of direct labour at a rate of $10 per hour.
Item 5. Fixed Overhead
The annual budget for fixed manufacturing overhead items follows:
Factory salaries $186,200
Property taxes 26,000
Insurance 28,800
Maintenance 8,000
Utilities 30,000
Depreciation 10,000
Total $289,000
Fixed overhead is applied to production using a predetermined overhead rate based on the
estimated annual production volume. All fixed overheads are paid evenly each quarter.
Item 6. Selling and Administrative Expenses
Annual fixed selling and administration expenses are as follows:
Sales salaries $45,000
Administration salaries 45,000
Travel 1,300
Insurance 3,400
Utilities 2,400
Depreciation 8,000
Total $105,100
Fixed selling and administration expenses are paid evenly over the four quarters of the year.
Item 7. Income Tax Payment
Lambda Inc. usually makes income tax payments for the previous year’s taxable income in the
second quarter every year. The company is subject to a 20% tax rate. However, the company
already paid all income taxes for the previous year (2021) at the end of Q1 2022.
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Item 8. Cash Management and Debt Financing
The cash management goal is to keep the cash balance above $15,000 at the end of each quarter.
The company will utilize the line of credit at 2% of annual interest up to $500,000 to meet the
cash balance target. Assume that the borrowing occurs at the end of the quarter. Interest
payments occur at the end of the quarter.
Item 9. Balance Sheet as of March 31, 2022
The company’s simplified balance sheet as of March 31, 2022 is as follows:
Cash $50,000 Accounts Payable (1) $74,300
Accounts Receivable 0
Raw Material Inventory (2) 24,300
Finished Goods Inventory 0 Capital Stock 600,000
Buildings and Equipment 1,000,000 Retained Earnings 200,000
Accumulated Depreciation (200,000)
Total Assets $874,300 Total Liabilities and Shareholder's Equity $874,300
These balance sheet figures must be taken as given. Negative balances are in the parentheses.
(1) Accounts payables are for direct materials; to be paid in cash in Q2 2022
(2) Includes both TPU 95A and PCB