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Case 9-47 (Algo) Comprehensive Master Budget; Short-Term Financing; Acquisition of Robotic Equipment (LO 9-2, 9-3, 9-5, 9-6)

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Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firms master budget for 20x1. Ive decided to go ahead and purchase the industrial robot weve been talking about. Well 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.

In response to a question about financing the acquisition, Vaughn replied as follows: The robot will cost $1,300,000. Well finance it with a one-year $1,300,000 loan from Shark Bank and Trust Company. Ive negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well. With that the meeting broke up, and the budget process was on.

Frame-It Company is a manufacturer of metal picture frames. The firms two product lines are designated as S (small frames; 5 7 inches) and L (large frames; 8 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 2-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. LaKendra Jackson, Frame-Its controller, is in charge of preparing the master budget for 20x1. She has gathered the following information:

1. All of Frame-Its direct-material purchases are made on account, and 80 percent of each quarters purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.