Incremental Analysis and Budgeting questions

PART III INCREMENTAL ANALYSIS (26 points) This problem consists of two independent mini-problems. A. Pep Manufacturing produces Product K in batches of 4,000 gallons at $.60 per gallon. Product K can be sold without further processing for $0.80 per gallon. Product K can be processed further to yield Product G, which can be sold for $1.25 per gallon. Product G requires additional processing costs at $1,650 per batch. Instructions Compute the incremental income from further production of one batch of Product K. B. Parker Manufacturers produces can openers. For the first six months of 2011, the company reported the following operating results while operating at 80% of plant capacity. Sales Cost of goods sold Gross profit Operating expenses Net income $4,000,000 2,500,000 1,500,000 1,000,000 $ 500,000 Cost of goods sold was 70% variable and 30% fixed. Operating expenses were 70% variable and 30% fixed. In September 2011, Parker Manufacturers receives a special order for 15,000 can openers at $7.50 from a foreign company. The can openers normally sell for $8.00. Acceptance of the special order would result in $5,000 of shipping costs but no increase in fixed operating expenses. Instructions Prepare an incremental analysis for the special order. PART IV BUDGETARY PLANNING (32 points) This problem consists of four independent mini-problems. Omit headings other than those already given. A. Dryer Manufacturing produces and sells containers designed to hold liquid beverages. The sales budget for 2011 is as follows: 1st quarter 90,000 units 2nd quarter 120,000 units 3rd quarter 135,000 units 4th quarter 105,000 units Dryer desires an ending inventory equal to 10% of the next quarter's sales. January 1, 2011 inventory is 9,000 units. Unit sales during the 1st quarter of 2012 are estimated at 90,000 units. Instructions: Compute required production for the year, showing quarterly data. B. Parker Manufacturers is preparing its direct labor budget for the second quarter of 2011 from the following budgeted production figures: April70,000 units; May 100,000 units; and June110,000 units. Each unit requires 2 hour of direct labor. The hourly wage rates are expected to be $14 in April and May and $16 in June. Instructions: Prepare a direct labor budget for the quarter, showing monthly data. C. Carson's Widget Works makes 70% of its sales on credit. Experience shows that 60% of the credit customers pay in the month of sale, 30% within the following month, the rest in the next month. Total sales for May, June, July, and August are estimated at $210,000; $240,000; $300,000; and $250,000, respectively. Instructions: Determine budgeted cash receipts for July and August. D. John's Sporting Goods is preparing its annual cash budget, showing quarterly data, for 2011. A $20,000 cash balance is desired at the end of each quarter. Borrowings and repayments are in $1,000 increments at 12% annual interest. The company borrows at the beginning of a quarter based on the estimated deficiency. Interest is paid only when principal is repaid at the end of a quarter with excess cash. The maximum amount of principal was repaid in the second quarter. The cash balance on December 31, 2010 is $21,000. Total receipts and disbursements, other than borrowings and principal or interest payments, are estimated at: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Disbursements: $226,000 $226,000 $244,000 $260,000 Receipts: 216,000 230,000 245,000 253,000 Instructions: Prepare a schedule of estimated borrowings and repayments of principal and interest for 2008 and its quarters. Solution of 1st problem A)Compute the incremental income from further production of one batch of Product K. Particulars Incremental revenue (1.25-.80) Less Incremental Cost of further processing Incremental income from Further processing Amount $ 1,800 1,650 150 B) Prepare an incremental analysis for the special order. Particulars Revenue from special order (15000*7.50) Variable costs from special order (15,000 X $3.50) Variable operating expenses from special order (15,000 X $1.40) Contribution margin from special order Fixed costs from special order Net income from special order Amount $ 112,500 52,500 21,000 39,000 5,000 34,000 Solution of 2nd problem A) : Compute required production for the year, showing quarterly data. Particulars Total production units 4th Quarter 120,000 135,000 105,000 450,000 12,000 102,000 13,500 133,500 10,500 145,500 9,000 114,000 45,000 495,000 12,000 13,500 10,500 45,000 93,000 Less: units of beg. Fin. Goods Inv. 3rd Quarter 9,000 Plus desired units of ending Fin. Goods Inv. 10 % of next months sale Desired Total Units 2nd Quarter 90,000 Sales in units 1st Quarter Total 121,500 132,000 103,500 450,000 B) Prepare a direct labor budget for the quarter, showing monthly data. Particulars April May Total June 70,000 100,000 110,000 280,000 2 2 2 2 140,000 200,000 220,000 560,000 14 14 16 2,016,000 Total production units 2,800,000 3,520,000 x Direct labor Hours per unit Total direct labor hours x Direct labor cost per hr. Total direct labor cost 8,336,000 c) : Determine budgeted cash receipts for July and August. Particulars Sales 30% paid in the same month Credit sales 60% of credit sales in the same month 30% in the next month 10% in the second month Total Cash Collections May June 210,000 63,000 147,000 88,200 240,000 72,000 168,000 100,800 44,100 151,200 216,900 July 300,000 90,000 210,000 126,000 50,400 14,700 281,100 August 250,000 75,000 175,000 105,000 63,000 16,800 259,800 D) Prepare a schedule of estimated borrowings and repayments of principal and interest for 2008 and its quarters Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Cash Receipts: Total cash payments Cash increase (decrease) 216,000 226,000 (10,000) 230,000 226,000 4,000 245,000 244,000 1,000 253,000 260,000 (7,000) Beginning balance cash 21,000 20,000 20,460 21,460 Cash balance before financing 11,000 24,000 21,460 14,460 Financing Section: Principal borrowed Principal repaid Interest paid Ending Cash balance 9,000 6,000 3,000 540 20,000 20,460 21,460 20,460 Total 944,000 956,000 (12,000) 1st Quarter 90,000 Solution of 1st problem A)Compute the incremental income from further production of one batch of Product K. Particulars Incremental revenue (1.25-.80) Less Incremental Cost of further processing Incremental income from Further processing Amount $ 1,800 1,650 150 B) Prepare an incremental analysis for the special order. Particulars Revenue from special order (15000*7.50) Variable costs from special order (15,000 X $3.50) Variable operating expenses from special order (15,000 X $1.40) Contribution margin from special order Fixed costs from special order Net income from special order Amount $ 112,500 52,500 21,000 39,000 5,000 34,000 Solution of 2nd problem A) : Compute required production for the year, showing quarterly data. Particulars Total production units 4th Quarter 120,000 135,000 105,000 450,000 12,000 102,000 13,500 133,500 10,500 145,500 9,000 114,000 45,000 495,000 12,000 13,500 10,500 45,000 93,000 Less: units of beg. Fin. Goods Inv. 3rd Quarter 9,000 Plus desired units of ending Fin. Goods Inv. 10 % of next months sale Desired Total Units 2nd Quarter 90,000 Sales in units 1st Quarter Total 121,500 132,000 103,500 450,000 B) Prepare a direct labor budget for the quarter, showing monthly data. Particulars April May Total June 70,000 100,000 110,000 280,000 2 2 2 2 140,000 200,000 220,000 560,000 14 14 16 2,016,000 Total production units 2,800,000 3,520,000 x Direct labor Hours per unit Total direct labor hours x Direct labor cost per hr. Total direct labor cost 8,336,000 c) : Determine budgeted cash receipts for July and August. Particulars Sales 30% paid in the same month Credit sales 60% of credit sales in the same month 30% in the next month 10% in the second month Total Cash Collections May June 210,000 63,000 147,000 88,200 240,000 72,000 168,000 100,800 44,100 151,200 216,900 July 300,000 90,000 210,000 126,000 50,400 14,700 281,100 August 250,000 75,000 175,000 105,000 63,000 16,800 259,800 D) Prepare a schedule of estimated borrowings and repayments of principal and interest for 2008 and its quarters Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Cash Receipts: Total cash payments Cash increase (decrease) 216,000 226,000 (10,000) 230,000 226,000 4,000 245,000 244,000 1,000 253,000 260,000 (7,000) Beginning balance cash 21,000 20,000 20,460 21,460 Cash balance before financing 11,000 24,000 21,460 14,460 Financing Section: Principal borrowed Principal repaid Interest paid Ending Cash balance 9,000 6,000 3,000 540 20,000 20,460 21,460 20,460 Total 944,000 956,000 (12,000) 1st Quarter 90,000