Sales and selling price per unit Historical sales for 2012 the two products are shown below. Harveys
Question:
Sales and selling price per unit
Historical sales for 2012 the two products are shown below.
Harvey’s sales typically peak in the summer months, beginning with May. Harvey’s general manager, Mr. Lipscomb, recommends that the budget be prepared with the units sold in the high sales months of May, June, and July be used as the bases for determining the annual forecast. Mr. Lipscomb’s recommendation is that annual sales be budgeted at 64,000 per month for screwdrivers and 42,000 per month for saws.
Mr. Lipscomb also believes that the budgeted selling price per unit should be equal to the highest selling price that could be achieved in 2012. He would like to budget 102 per unit for screwdrivers and 130 per unit for saws. Mr. Lipscomb states that his management team experimented with pricing in the prior year, beginning with the first month of the year.
You review the unit sales and unit selling price information for 2012 and recommend a budget based on 60,000 units of screwdrivers at 100 each and 40,000 units of saws at 125 each. Mr. Lipscomb challenges your conclusion. Likewise Mr. Owens, the company president, would like to hear an explanation of the budget numbers and how or why you calculated those numbers.
Production Requirements
Each unit produced requires the following materials, labor, and overhead, all of which is variable.
Inventories
Inventories are listed below. The beginning inventories are the actual amounts on hand at the beginning of the year. The ending inventories shown are the amounts that the operations manager has determined to be necessary to ensure smooth production processes.
Other information
Fixed manufacturing overhead
Fixed manufacturing overhead is 214,000, including 156,000 of non-cash expenditures.
Fixed manufacturing overhead is allocated on total units produced.
Beginning cash is 1,800,000.
Sales are on credit. Sales are collected 50 percent in the current period and the remainder in the next period. There are no bad debts.
Sales for the last quarter were 8,400,000.
Purchases for direct materials and labor costs are paid for in the quarter acquired.
Manufacturing overhead expenses are paid in the quarter incurred.
Selling and administrative expenses are all fixed and are paid in the quarter incurred.
Estimated selling and administrative expenses for the next period are 340,000 per quarter, including 90,000 of depreciation.
REQUIREMENTS:
1. Prepare a sales budget in good form.
2. Prepare a narrative report explaining how your sales budget was determined. Use the table above in your analysis. (Hint: Many companies would develop their budgets using average sales and average unit costs.)
Whatever budget determination method you use should be explained. In your explanation, you should include a discussion of why you believe sales and selling prices fluctuated last year.
3. Prepare a production budget in units.
4. Prepare a purchases budget. Remember that you will need to purchase enough materials to have the required ending inventories shown. You will also need to purchase enough to manufacture and sell the products on your sales forecast. Do not forget that you have beginning inventories.
5. Prepare a narrative report explaining how you prepared the purchases budget. Be as detailed as necessary to be sure that the president and general manager will understand the calculations and costs.
6. Prepare a budgeted income statement.
7. Prepare a contribution margin income statement.
8. Prepare a narrative report explaining how the expenses on the income statement were determined.
9. Prepare a cash budget. Be sure that you show all cash inflows and outflows.
10. Prepare a narrative report explaining your cash budget process.
11. If necessary, prepare a capital expenditure budget. Explain your entries. Use only the facts in this case to prepare the budget.
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman