Tylenol Ltd. is a small-scale contract producer of antiviral drugs. The master budget will detail each quarter’s activity and the activity for the year in total Tylenol will base its 2022 budget on the following information:

Expected sales, in units, for the four quarters of 2022 and the first two quarters of 2023 are as follows:

2022 Q1 4,100
2022 Q2 17,500
2022 Q3 28,500
2022 Q4 37,000
2023 Q1 48,000
2023 Q2 51,000

The selling price for 2022 has been set at $52.00 per unit. tylenol’s fiscal year ends on December 31. All sales are on account. 70% of sales on account are collected in the quarter of sale; 30% of sales on account are collected in the following quarter. Assume that all the balance in accounts receivable (as of 31st December, 2021) will be collected in the first quarter of 2022. Assume no bad debts are incurred.

Each component requires the following direct inputs:

• 5 milligrams (mg) of direct material available at a price of $1.60 per mg.
• 0.05 hours of direct labor at a rate of $45.00 per hour.

Tylenol has a policy of maintaining direct material ending inventory equal to 25% of direct materials needed for the next quarter’s production requirements. All raw materials are purchased on account. 50% of a quarter’s purchases are paid for in the quarter of purchase; the remaining in the following quarter. Tylenol has a policy of keeping ending finished goods inventory equal to 30% of next quarter’s forecasted sales. There is no beginning or ending work-in-process inventory. Direct laborers are paid at the end of each month.

Total budgeted variable overhead costs for the 2022 year (at a level of sales estimated in Item 1 above) follow:

Indirect materials $31,500
Indirect labor 67,000
Employee benefits 90,520
Testing 27,000
Utilities 51,000
Total $267,020

Variable overhead is applied to components using a predetermined overhead rate based on annual direct labor hours. All variable overhead items are paid for in the quarter incurred.

The annual budget for fixed manufacturing overhead items follows:

Supervisory salaries $203,400
Property taxes 32,500
Insurance 31,000
Maintenance 48,000
Utilities 33,000
Engineering 47,000
Depreciation 86,000
Total $480,900

All fixed overheads are paid evenly each quarter except for property taxes which are paid for in the second quarter of the year. Fixed overhead is applied to production using a predetermined overhead rate based on the estimated annual number of units produced.

Variable selling and administration expenses include commissions and other administrative expenses. Commissions are budgeted at 5% of sales dollars for the quarter. 70% of these commissions are paid in the quarter they incurred, while 30% are paid in the following quarter. Other variable administration costs are $2.00 per unit. These costs are paid for in the quarter they incurred.

Annual fixed selling and administration expenses are as follows:

Sales salaries $178,000
Administration salaries 112,000
Telecommunications 19,000
Insurance 5,500
Utilities 3,400
Depreciation 15,000
Other 2,700
Total $335,600

Fixed selling and administration expenses are paid evenly over the four quarters of the year.

Tylenol makes quarterly income tax installments based on the projected taxable income for the year. The company is subject to a 32% tax rate. For the master budget, Tylenol assumes tax expenses incurring for the year 2022 are paid in cash evenly over the four
quarters of the year 2022.

Tylenol plans the following financing and investing activities for the coming year:

The company is planning to buy a trademark, costing $80,000, in the last quarter of 2022. This trademark will be held until such time that the company is ready to sell products directly to retailers. The company will pay cash for the trademark and will finance any resulting cash shortfall by drawing on its operating line of credit.
• The company has an operating line of credit established with its bank. This allows the company to borrow to cover any cash shortfalls. All borrowing is assumed to occur at the beginning of the quarter in which the funds are required and all repayment is assumed to be made at the end of the quarter in which funds are available for repayment. Simple interest at the rate of 9% per annum is paid on a quarterly basis on all outstanding short-term loans.
• The company currently has $250,000 in an outstanding long-term loan with an
annual interest rate of 7% and makes quarterly interest-only payments at the end of each quarter. The loan is due in 2034.
• The company outsources some of the manufacturing for $650,000. The company will pay the outsourcing fee in cash at the end of the first quarter of the year 2022.

The company’s simplified balance sheet as of December 31, 2021, is as follows:

Cash $55,000 Accounts Payable (1) $10,000
Accounts Receivable 7,000 Commissions Payable 5,000
Raw Material Inventory 0 Long-term Debt 250,000
Finished Goods
Inventory 0 Capital Stock 1,842,000
Buildings and
Equipment 2,100,000 Retained Earnings (Deficit) (250,000)
Accumulated
Depreciation (305,000)
Total Assets $1,857,000 Total Liabilities and Shareholders’
Equity $1,857,000

These balance sheet figures must be taken as given. That is, these specific December 31, 2021 balance sheet amounts override any expectations based on 2021 sales and purchase amounts. Negative balances are shown in parentheses.
(1) Only used for direct materials

Required:

1. Prepare a master budget for Tylenol for each quarter of 2022 and for the year in total. The following component budgets must be included:

a. Beginning balance sheet (classified as in Item 8, Project)
b. Sales budget
c. Schedule of receipts
d. Production budget
e. Direct materials purchase budget
f. Schedule of disbursements for materials
g. Direct labor budget
h. Overhead budget (be sure to show disbursements for variable and fixed overheads, in
addition to applied variable and fixed overhead expenses).
i. Selling and administrative budget (be sure to show disbursements for selling and
administrative expenses).
j. Cash budget

Prepare the following for the year, 2022, in total.

k. Cost of goods manufactured budget
l. Cost of goods sold budget
m. Budgeted income statement (using absorption costing)
n. Budgeted classified balance sheet

Cash budget and budgeted income statement are completed at the same time when you build a formula to account for tax expenses, and a set of formulas to account for cash outflow in the cash budget. The budgeted classified balance sheet is completed last.

2. The current price of $52.00 per unit is set during the last year’s trial stage production. Tylenol plans to scale up the production to meet the growing demand. The resulting economies of scale allow the company to consider strategic pricing and compensation.

Re-evaluate the current price, using the master budget that you built for part 1. Strategically, updated pricing should satisfy the following criteria:
• The price should be less than $52.00 per unit to beat other small-scale producers
in price competition.
• The company must achieve profit margins (= Operating income/Sales) between
5% and 10%
The company also needs to increase employee benefits and compensation by $100,000 to retain skilled manufacturing workers and production engineers. Provide a single or range of values for the unit price.

3. Within your written report, provide support for your strategic pricing and compensation. You may do this either based on (i) Tylenol as a contract producer of antiviral drugs or (ii) Tylenol operating in another industry or business of your choice (e.g., services, media, luxury goods, retail, software engineering, manufacturing, real estate development and investment, biotech, fin-tech, advertisement, higher education, mining, oil, and gas,
agriculture, social work, professional services, etc).

It is important to consider the applicable business, industry, and regulatory environment in your analysis. Provide quantitative and qualitative support for your strategic plan, explaining how the firm may gain a competitive advantage given the information provided. Ensure to address profit maximization/growth, employee compensation, and
risk.

Instructions for preparing Excel spreadsheets:

1. Develop your entire master budget in one worksheet; i.e., present your beginning balance sheet first, then present your sales budget below it and the next budget below, etc. All of the given information is entered at the top of the workbook and the entire budget for each alternative is to be in a single workbook.

2. When you have finalized the master budget, start work on the sensitivity (what-if) analyses for part 2. First, copy the master budget onto a new worksheet (i.e., a new tab). Then make the necessary changes on the copied worksheet. If you have fully programmed the first worksheet, the results of your changes will be immediately calculated. Label the worksheet tabs and the title of the worksheet so that it is clear what you are calculating. (Use a header to label the worksheet so that the content of the worksheet is clear.)

3. Part of your mark will depend on how well you link the parts of your spreadsheets.