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Chapter 22: Q46PGB (page 1250)

Using sensitivity analysis Caputo Company prepared the following budgeted income statement for the first quarter of 2018:

Caputo Company is considering two options. Option 1 is to increase advertising by \(1,100 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.

Requirements

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)10,000. Round all calculations to the nearest dollar.

2. Which option should Caputo choose? Explain your reasoning.

Short Answer

Expert verified
  1. Budget, option 1 - $4,239 and option 2 - $4,375
  2. Holly should choose option 2.

Step by step solution

01

Preparation of budget under both options

Option 1:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (50% of sales)

5,000

6,250

7,813

19,063

Gross profit

5,000

6,250

7,812

19,062

S&A Expenses ($4,100 + 5% of sales)

4,600

4,725

4,881

14,206

Operating income

1,600

1,525

2,931

6,056

Income Tax Expense (30% of operating income)

480

458

879

1,817

Net Income

$1,120

$1,067

$2,052

$4,239

Option 2:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (55% of sales)

5,500

6,875

8,594

20,969

Gross profit

4,500

5,625

7,031

17,156

S&A Expenses ($3,000 + 5% of sales)

3,500

3,625

3,781

10,906

Operating income

1,000

2,000

3,250

6,250

Income Tax Expense (30% of operating income)

300

600

975

1,875

Net Income

$700

$1,400

$2,275

$4,375

02

Sensitivity Analysis

Holly should choose option 2 because under option 1 the company will earn $4,375.

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Most popular questions from this chapter

What is the capital expenditures budget?

Preparing a financial budget鈥攂udgeted income statement and balance sheet Ball Company has the following post-closing trial balance on December 31, 2018:

The company鈥檚 accounting department has gathered the following budgeting information for the first quarter of 2019:

Budgeted total sales, all on account $ 121,800 Budgeted purchases of merchandise inventory, all on account 60,400 Budgeted cost of goods sold 60,900 Budgeted selling and administrative expenses:

Commissions expense 6,090 Salaries expense 7,000 Rent expense 4,100 Depreciation expense 600 Insurance expense 400 Budgeted cash receipts from customers 125,840 Budgeted cash payments for merchandise inventory 67,775 Budgeted cash payments for salaries and commissions 14,822 Budgeted income tax expense 5,400 Additional information: Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

Requirements

  1. Prepare a budgeted income statement for the quarter ended March 31, 2019.
  2. 2. Prepare a budgeted balance sheet as of March 31, 2019.

Preparing an operating budget鈥攕ales budget

Yarbrough Company manufactures T-shirts printed with tourist destination logos. The following table shows sales prices and projected sales volume for the summer months:

Projected Sales in Units T-Shirt Sizes Sales Price June July August Youth $ 7 575 500 525 Adult鈥攔egular 17 625 900 825 Adult鈥攐versized 18 400 500 475 Prepare a sales budget for Yarbrough Company for the three months.

Question:Brooks Company expects to sell 8,500 units for \(175 each for a total of \)1,487,500 in January and 2,500 units for \(200 each for a total of \)500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for \(280 each. Brooks鈥檚 target ending inventory is \)20,000 plus 50% of the next month鈥檚 cost of goods sold. Prepare Brooks鈥檚 inventory, purchases, and cost of goods sold budget for January and February

Question: Preparing an operating budget鈥攕ales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets

The Langley Batting Company manufactures wood baseball bats. Langley鈥檚 two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Langley sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(40; the adult bat sells for \)65. Langley鈥檚 highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Langley鈥檚 balance sheet for December 31, 2018, follows:

Other data for Langley Batting Company for the first quarter of 2019:

a. Budgeted sales are 1,200 youth bats and 2,600 adult bats.

b. Finished Goods Inventory on December 31, 2018, consists of 300 youth bats at \(14 each and 950 adult bats at \)18 each.

c. Desired ending Finished Goods Inventory is 350 youth bats and 300 adult bats; FIFO inventory costing method is used.

d. Direct materials requirements are 48 ounces of wood per youth bat and 56 ounces of wood per adult bat. The cost of wood is \(0.25 per ounce.

e. Raw Materials Inventory of December 31, 2018, consists of 24,000 ounces of wood at \)0.25 per ounce.

f. Desired ending Raw Materials Inventory is 24,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).

g. Each bat requires 0.7 hours of direct labor; direct labor costs average \(18 per hour. h. Variable manufacturing overhead is \)0.30 per bat.

i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)20,140 per quarter for other costs, such as insurance and property taxes.

j. Fixed selling and administrative expenses include \(9,000 per quarter for salaries; \)2,500 per quarter for rent; \(1,000 per quarter for insurance; and \)200 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 2% of sales.

Requirements

1. Prepare Langley鈥檚 sales budget for the first quarter of 2019.

2. Prepare Langley鈥檚 production budget for the first quarter of 2019.

3. Prepare Langley鈥檚 direct materials budget, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.

4. Prepare Langley鈥檚 cost of goods sold budget for the first quarter of 2019.

5. Prepare Langley鈥檚 selling and administrative expense budget for the first quarter of 2019.
See all solutions

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