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Chapter 22: Q37E (page 1239)

Using sensitivity analysis Rucker Company prepared the following budgeted income statement for 2019:

Requirements

1. Prepare a budgeted income statement with columns for 700 units, 1,300 units, and 1,700 units sold.

2. How might managers use this type of budgeted income statement?

3. How might spreadsheet software such as Excel assist in this type of analysis?

Short Answer

Expert verified

The operating income at 700 units, 1,300 units, and $1,700 units is $126,000, $234,000, and $306,000 respectively.

Step by step solution

01

Preparation of budgeted income statement

RUCKER COMPANY

Budgeted Income Statement

For the year ended December 31, 2019

700 Units

1,300 Units

1,700 Units

Sales revenue ($400 per unit)

$280,000

$520,000

$680,000

LESS: Cost of goods sold (45% of sales)

$126,000

$234,000

$306,000

Gross profit

$154,000

$286,000

$374,000

LESS: Selling and Administrative Expenses (10% of sales)

$28,000

$52,000

$68,000

Operating Income

$126,000

$234,000

$306,000

02

How managers use this type of budgeted income statement

Managers use flexible budget for the sensitivity analysis. They analyze different level of sales to know at which level the company will earn maximum profit.

03

Use of spreadsheet software in sensitivity analysis

Companies prepare master budget using spreadsheet software. These software help in preparing what if budgets within few keystrokes that can be used for sensitivity analysis

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Most popular questions from this chapter

Preparing a financial budget鈥攃ash budget

Wilson Company has \(11,000 in cash on hand on January 1 and has collected the following budget data:

January February Sales \) 1,400,000 \( 710,000 Cash receipts from customers 851,420 871,800 Cash payments for merchandise inventory 561,100 532,310

Assume Wilson has cash payments for selling and administrative expenses including salaries of \)55,000 plus commissions of 2% of sales, all paid in the month of sale. The company requires a minimum cash balance of $8,500. Prepare a cash budget for January and February. Will Wilson need to borrow cash by the end of February?

Question: Preparing a financial budget鈥攕chedule of cash receipts, schedule of cash payments, cash budget

Puckett Company has provided the following budget information for the first quarter of 2018:

Total sales \( 216,000

Budgeted purchases of direct materials 40,600

Budgeted direct labor cost 36,800 Budgeted manufacturing overhead costs:

Variable manufacturing overhead 1,025

Depreciation 1,000

Insurance and property taxes 6,650

Budgeted selling and administrative expenses:

Salaries expense 14,000

Rent expense 2,500

Insurance expense 2,000

Depreciation expense 350

Supplies expense 4,320

Additional data related to the first quarter of 2018 for Puckett Company:

a. Capital expenditures include \)41,000 for new manufacturing equipment to be purchased and paid in the first quarter.

b. Cash receipts are 75% of sales in the quarter of the sale and 25% in the quarter following the sale.

c. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter.

d. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

e. Income tax expense for the first quarter is projected at \(49,000 and is paid in the quarter incurred.

f. Puckett Company expects to have adequate cash funds and does not anticipate borrowing in the first quarter.

g. The December 31, 2017, balance in Cash is \)25,000, in Accounts Receivable is \(21,600, and in Accounts Payable is \)16,500.

Requirements

1. Prepare Puckett Company鈥檚 schedule of cash receipts from customers and schedule of cash payments for the first quarter of 2018.

2. Prepare Puckett Company鈥檚 cash budget for the first quarter of 2018.

Completing a comprehensive budgeting problem鈥攎anufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin鈥檚 balance sheet for December31, 2018, follows:

Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)36 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter鈥檚 sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter鈥檚 direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 for new manufacturing equipment, to be purchased and paid in the first quarter. m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. p. Income tax expense is projected at \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Gavin鈥檚 operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated basedon direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Gavin鈥檚 annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Understanding the components of the master budgetThe following are some of the components included in the master budget of amerchandising company.

a. Budgeted balance sheet

b. Sales budget

c. Capital expenditures budget

d. Budgeted income statement

e. Cash budget

f. Inventory, purchases, and cost of goods sold budget

g. Selling and administrative expense budget

List the items of the master budget in order of preparation.

Preparing an operating budget鈥攊nventory, purchases, and cost of goods sold budget

Slate, Inc. sells tire rims. Its sales budget for the nine months ended September 30, 2018, follows:

Quarter Ended Nine-MonthTotal

March 31 June 30 September 30 Cash sales, 20% \( 28,000 \) 38,000 \( 33,000 \) 99,000

Credit sales, 80% 112,000 152,000 132,000 396,000 Total sales \( 140,000 \) 190,000 \( 165,000 \) 495,000

In the past, cost of goods sold has been 40% of total sales. The director of marketing and the financial vice president agree that each quarter鈥檚 ending inventory should not be below \(5,000 plus 10% of cost of goods sold for the following quarter. The marketing director expects sales of \)240,000 during the fourth quarter. The January 1 inventory was $38,000. Prepare an inventory, purchases, and cost of goods sold budget for each of the first three quarters of the year. Compute cost of goods sold for the entire nine-month period.
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