PROBLEM 9-40 (60 MINUTES)

1.

Sales budget for 20x0:

Units

Price

Total

Light coils.......................................................................

60,000

$120

$ 7,200,000

Heavy coils.....................................................................

40,000

170

6,800,000

Projected sales................................................................

2.

$14,000,000

Production budget (in units) for 20x0:

Light Coils

Heavy Coils

Projected sales........................................................................................

60,000

40,000

Add: Desired inventories,

December 31, 20x0.............................................................................

25,000

9,000

Total requirements...................................................................................

85,000

49,000

Deduct: Expected inventories, January 1, 20x0......................................

20,000

8,000

Production required (units).....................................................................

65,000

41,000

3.

Raw-material purchases budget (in quantities) for 20x0:

Raw Material
Sheet
Metal

Copper Wire
Platforms

Light coils (65,000 units projected

to be produced).........................................................

130,000

65,000

__

Heavy coils (41,000 units projected

to be produced).........................................................

102,500

61,500

41,000

Production requirements.................................................

232,500

126,500

41,000

Add: Desired inventories, December 31, 20x0................

18,000

16,000

7,000

Total requirements...........................................................

250,500

142,500

48,000

Deduct: Expected inventories,

January 1, 20x0........................................................

16,000

14,500

6,000

Purchase requirements (quantity)...................................

234,500

128,000

42,000

4.

Raw-material purchases budget for 20x0:

Raw Material
Required (units)

Raw Material

Anticipated
Purchase
Price

Total

Sheet metal....................................................................

234,500

$16

$3,752,000

Copper wire...................................................................

128,000

10

1,280,000

Platforms.......................................................................

42,000

126,000

Total..............................................................................

5.

$5,158,000

Direct-labor budget for 20x0:

Projected
Production
(units)

Hours
per
Unit

Total
Hours

Rate

Total
Cost

Light coils..........................................

65,000

130,000

$15

$1,950,000

Heavy coils........................................

41,000

123,000

20

2,460,000

Total...................................................

6.

$4,410,000

Manufacturing overhead budget for 20x0:

Cost Driver
Quantity

Cost
Driver
Rate

Budgeted
Cost

Purchasing and material handling..................................

Depreciation, utilities, and inspection...........................
Shipping........................................................................
General manufacturing overhead...................................

362,500 kg.a
106,000 coils b
100,000c
253,000 hr. d

Total manufacturing overhead.......................................

a

362,500 = 234,500 + 128,000 (from req. 3)

106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)
b

$0.55
$4.00
$1.00
$3.00

$199,375
424,000
100,000
759,000
$1,482,375

PROBLEM 9-39 (40 MINUTES)

1.

Empire Chemical Companys production budget (in gallons) for the three products for 20x2 is
calculated as follows:
Yarex
Darol
Norex
Sales for 20x2...................................................
60,000
40,000
25,000
Add: Inventory, 12/31/x2
(.08 20x3 sales)........................................
5,200
2,800
2,400
Total required...................................................
65,200
42,800
27,400
Deduct: Inventory, 12/31/x1
(.08 20x2 sales).......................................
4,800
3,200
2,000
Required production in 20x2............................
60,400
39,600
25,400

2.

The companys conversion cost budget for 20x2 is shown in the following schedule:

3.

Conversion hours required:

Yarex (60,400 .07).........................................
Darol (39,600 .10).........................................
Norex (25,400 .16)........................................
Total hours........................................................

4,228
3,960
4,064
12,252

Conversion cost budget (12,252 $20)............

$245,040

Since the 20x1 usage of Islin is 100,000 gallons, the firms raw-material purchases budget (in
dollars) for Islin for 20x2 is as follows:
Quantity of Islin required for production in 20x2 (in gallons):
Yarex (60,400 1)............................................................................
Darol (39,600 .7)...........................................................................
Norex (25,400 .5)..........................................................................
Subtotal..................................................................................................
Add: Required inventory, 12/31/x2 (100,820 .10)................................
Subtotal...................................................................................................
Deduct: Inventory, 1/1/x2 (100,000 .10)..............................................
Required purchases (gallons)..................................................................
Purchases budget (100,902 gallons $5 per gallon)...............................

4.

60,400
27,720
12,700
100,820
10,082
110,902
10,000
100,902
$504,510

The company should continue using Islin, because the cost of using Philin is $76,316 greater than
using Islin, calculated as follows:
Change in material cost from substituting Philin for Islin:
20x2 production requirements:
Philin (100,820 $5 1.2)...............................................................
Islin (100,820 $5)..........................................................................
Increase in cost of raw material...............................................................

$604,920
504,100
$100,820

Change in conversion cost from substituting Philin for Islin:

Philin (12,252 $20 .9).................................................................
Islin (12,252 $20)..........................................................................
Decrease in conversion cost....................................................................
Net increase in production cost...............................................................
Note: all financial data in solution is in thousands (i.e., 000 omitted).
1.

$220,536
245,040
$(24,504)
$ 76,316

Schedule of cash collections:

January
Collection of accounts receivable:
$55,000 x 20%...
Collection of January sales ($150,000):
60% in January; 35% in February ..
Collection of February sales ($180,000):
60% in February; 35% in March..
Collection of March sales ($185,000):
60% in March; 35% in April..
Sale of equipment.
Total cash collections

2.

February

$ 11,000
90,000

$101,000

$ 52,500
108,000

$ 63,000

$160,500

111,000
5,000
$179,000

Schedule of cash disbursements:

January
Payment of accounts payable...
Payment of January purchases ($90,000):
70% in January; 30% in February..
Payment of February purchases ($100,000):
70% in February; 30% in March..
Payment of March purchases ($140,000):
70% in March; 30% in April..
Cash operating costs..
Total cash disbursements...

3.

March

February

March

$ 22,000
63,000

31,000
$116,000

$ 27,000
70,000

$ 30,000

24,000
$121,000

98,000
45,000
$173,000

Cash budget:

Beginning cash balance.

Total receipts.
Subtotal.
Less: Total disbursements
Cash excess (deficiency) before financing
Financing:
Borrowing to maintain $20,000 balance..
Loan principal repaid
Loan interest paid..
Ending cash balance
* $15,000 x 8% x 2/12

January

February

March

$ 20,000
101,000
$121,000
116,000
$ 5,000

$ 20,000
160,500
$180,500
121,000
$ 59,500

$ 44,300
179,000
$223,300
173,000
$ 50,300

(15,000)
(200)*
$ 44,300

$ 50,300

15,000
$ 20,000