91Ó°ÊÓ

Revenues, production, and purchases budgets. The Yucatan Co. in Mexico has a division that manufactures bicycles. Its budgeted sales for Model \(\mathrm{XG}\) in 2018 are 95,000 units. Yucatan's target ending inventory is 7,000 units, and its beginning inventory is 11,000 units. The company's budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle. Yucatan buys all its wheels from an outside supplier. No defective wheels are accepted. Yucatan's needs for extra wheels for replacement parts are ordered by a separate division of the company. The company's target ending inventory is 14,000 wheels, and its beginning inventory is 16,000 wheels. The budgeted purchase price is 400 pesos per wheel. 1\. Compute the budgeted revenues in pesos. 2\. Compute the number of bicycles that Yucatan should produce. 3\. Compute the budgeted purchases of wheels in units and in pesos. 4\. What actions can Yucatan's managers take to reduce budgeted purchasing costs of wheels assuming the same budgeted sales for Model XG?

Step by step solution

01

1. Budgeted Revenues

To compute the budgeted revenues, we need to multiply the budgeted sales (units) by the budgeted selling price per bicycle. Budgeted revenues = Budgeted sales (units) × Budgeted selling price per bicycle Budgeted_revenues = 95000 × 3500 Budgeted_revenues = 332,500,000 pesos

02

2. Number of Bicycles to Produce

To compute the number of bicycles Yucatan should produce, we will first find the total number of bicycles needed, considering the target ending inventory, and then subtract the beginning inventory. Total bicycles needed = Budgeted sales + Target ending inventory - Beginning inventory. Total_bicycles_needed = 95,000 + 7,000 - 11,000 Total_bicycles_needed = 91,000 bicycles

03

3. Budgeted Purchases of Wheels in Units and Pesos

First we will find the number of wheels needed to produce the bicycles, considering the target ending inventory for wheels, and then subtract the beginning inventory of wheels. Total wheels needed = Total_bicycles_needed × 2 (each bicycle has 2 wheels) + Target ending inventory - Beginning inventory Total_wheels_needed = 91,000 × 2 + 14,000 - 16,000 Total_wheels_needed = 180,000 wheels Next, we will compute the budgeted purchases in pesos by multiplying the total wheels needed with the budgeted purchase price per wheel. Budgeted_purchases_pesos = Total_wheels_needed × Budgeted_purchase_price_per_wheel Budgeted_purchases_pesos = 180,000 × 400 Budgeted_purchases_pesos = 72,000,000 pesos

04

4. Actions to Reduce Budgeted Purchasing Costs of Wheels

Yucatan's managers can take several actions to reduce the budgeted purchasing costs of wheels, assuming the same budgeted sales for Model XG: 1. Negotiate with the wheel supplier to obtain a lower price per unit. 2. Explore alternative suppliers that may offer better prices and maintain the same quality. 3. Optimize the production process to minimize defects, reducing the number of wheels needed for replacement. 4. Implement inventory management techniques to reduce holding costs and the need for excessive safety stock. 5. Order wheels in bulk or combine orders with other divisions of the company to qualify for potential volume discounts.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Budgeted Revenues Calculation

Calculating budgeted revenues is essential for businesses to forecast financial performance. In essence, it involves multiplying the expected sales volume by the product's selling price. For Yucatan Co., the budgeted revenues for Model XG bicycles are computed by taking the budgeted sales of 95,000 units and multiplying them by the selling price of 3,500 pesos per bicycle, resulting in total budgeted revenues of 332,500,000 pesos.

Understanding this calculation helps businesses set financial targets and make informed decisions. It allows Yucatan Co. managers to assess the potential profitability and to structure marketing and sales strategies around these revenue forecasts. Accurate budgeted revenue calculation is crucial for the overall budgeting process, forming a basis for various operational and strategic decisions.

Production Planning

Production planning involves determining the quantity of products that a company should manufacture to meet customer demand while controlling inventory levels. For Yucatan Co., the number of bicycles to be produced is decided by adding the target ending inventory to the budgeted sales and then subtracting the beginning inventory. This results in a need to produce 91,000 bicycles.

Effective production planning ensures that Yucatan has enough bicycles to meet sales forecasts without accumulating excess inventory, which can incur additional costs. This balance is critical for operating efficiency and helps in reducing waste and optimizing resource allocation. Moreover, production planning integrates closely with other areas like procurement, where careful scheduling can negotiate better terms with suppliers.

Inventory Management

Inventory management is the aspect of controlling the inflow and outflow of goods to prevent excessive or insufficient inventory. In Yucatan's case, efficient management of wheel inventories is necessary to ensure smooth production and limit holding costs. The company requires 180,000 wheels to meet its production and inventory targets, which entails adjusting the budgeted purchases accordingly.

The goal for Yucatan is to strike a balance between having enough wheel stock to prevent production delays and reducing the carrying costs associated with holding large inventories. This practice involves accurate forecasting, regular review of stock levels, and adjusting the order quantities as needed to maintain optimal inventory levels that support production without over-investing in inventory.

Cost Reduction Strategies

Cost reduction strategies are imperative in improving a company's profitability. After identifying the budgeted purchasing costs of wheels, Yucatan's managers can adopt several strategies to reduce these costs. Possible actions include negotiating with suppliers for better pricing, exploring alternative suppliers, or ordering in larger quantities to benefit from discounts. Additionally, optimizing the production process to reduce the need for replacement parts can lead to significant savings.

Implementing lean inventory techniques can also help manage costs more effectively. By minimizing holding costs and reducing surplus inventory, the company can lower overall expenses. A thorough analysis can reveal opportunities for bulk purchases or collaborative ordering within the company's divisions, optimizing the supply chain and reducing per-unit costs without compromising on the sales volume of Model XG bicycles.