You have been asked to prepare a 5 year budget forecast for the Kiewa Milk Dried Infant Formula canned product. The recently purchased Kiewa Milk Co utilises a traditional manufacturing cost flow inventory and accounting 

system.

 

Unit sales of this product have been rapidly increasing over the past three years with year on year growth of more than 20% per annum partly driven by Chinese Daigou shoppers who are satisfying the demand amongst the 

increasingly wealthy Chinese upper and middle class for high quality dairy products after several scandals involving Chinese-made produce. The Kiewa Milk Co has also been able to increase its per unit price of its infant formula by more than double the rate of inflation for each of the last three years. The marketing department are confident that these per annum increases will hold for the next five years.

 

The Strategic Planning Committee of Jupiter Australasia Ltd are finalising plans for the new division and have asked you to prepare a comprehensive 5 year budget for the Dried Infant Formula product line.

As at June 30th, 2020 the following financial and trading data was provided:

2020 Financial Year data

Sales (Units) = 27.65 million

Price (average 2020 price per unit received) = $2.300

Prime Costs (per unit)

Ingredients & Canning = $0.725

Direct Labour = $0.040

Other Variable Manufacturing Costs (per unit) = $1.250

Annual Fixed Manufacturing Overhead= $5,000,000

Inventory on Hand (at valuation):

Ingredients & Packaging (335,000 equivalent units) = $235,625

Finished Goods (325,000 units) = $727,500

All variable manufacturing costs including direct labour and ingredient costs are expected to increase annually at the rate of inflation. All manufacturing costs are variable and are assumed to vary directly with production (other 

than fixed manufacturing overhead). The current inflation rate of 2.0% is expected to hold over the 5 year budget period.

 

The Dried Infant Formula factory maintains target safety stock of raw materials inventory and tin can inventory amounting to the equivalent of one (1) week of the current year's budgeted unit production. Finished goods inventory levels are kept at the equivalent of one (1) week of the current year's budgeted unit sales. The Dried Infant Formula division does not utilise a Work in

Charles Sturt University Subject Outline

ACC512 202030 Additional Assessment

Process inventory account.

The Dried Infant Formula factory has been operating out of its site in the small town of Tangambalanga in the Kiewa Valley for almost 100 years and has undergone numerous upgrades. The manufacturing facility is currently 

operating at almost 80% of its estimated total practical manufacturing capacity of 35 million cans of baby formula per year.

 

Required:

(a) Five Year Budget (25 marks)

For the 5 year budget period prepare:

i. Sales, Production and Purchases budget

ii. Budgeted schedule of Cost of Goods Manufactured (COGM)

iii. Budgeted schedule of Cost of Goods Sold (COGS) and Gross Profit calculation

b) The Jupiter Australasia Strategic Management Committee has developed plans to have the factory completely overhauled in the next year (2021) which will double the capacity of the factory. The cost of the upgrade will be 

incurred as an additional $4 million Fixed Overhead manufacturing cost per annum.

 

Using the flexibility of the excel model developed in part (i) calculate the impact on sales and gross profit if the option of upgrading the manufacturing facility is exercised and the practical production capacity of the factory is 

increased by 100% and an extra manufacturing cost of $2 million is incurred each year from 2022. (Submit results as a separate worksheet).