The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells t
ID: 2416922 • Letter: T
Question
The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2016 follows:
GRILTON TIRE COMPANY
Balance Sheet
December 31, 2016
Assets
Current Assets:
Cash $ 39,000
Accounts Receivable 40,000
Raw Materials Inventory 2,400
Finished Goods Inventory 8,700
Total Current Assets $ 90,100
Property, Plant and Equipment:
Equipment 177,000
Less: Accumulated Depreciation (42,000) 135,000
Total Assets $225,100
Liabilities
Current Liabilities:
Accounts Payable $ 8,000
Stockholder’s Equity
Common Stock, no par $ 130,000
Retained Earnings 87,100
Total Stockholder’s Equity 217,100
Total Liabilities and Stockholder’s Equity $225,100
Other data for Grilton Tire Company:
Budgeted Sales are 1,500 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 30% of total sales, with the remaining 70% of sales on account.
Finished Goods Inventory on December 31, 2016 consists of 300 tires at $29 each.
Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2018 are expected to be 2,300 tires and second quarter sales for 2018 are expected to be 2,500. FIFO inventory costing method is used.
Direct Materials cost is $8 per tire.
Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production.
Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.
Variable manufacturing overhead is $2 per tire produced.
Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.
Fixed selling and administrative expenses include $8,000 per quarter for salaries; $1,800 per quarter for rent; $1,200 per quarter for insurance; and $500 per quarter for depreciation.
Variable selling and administrative expenses include supplies at 2% of sales.
Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale; December 31, 2016, Accounts Receivable is received in the first quarter of 2017.
Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2016, Accounts Payable is paid in the first quarter of 2017.
Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
Grilton desires to maintain a minimum cash balance of $35,000 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 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
REQUIREMENTS: Prepare a budgeted Income Statement for the year of 2017
Prepare a cash budget for the year of 2017.
What types of information do your budgets yield? Is cash flow adequate? Do sales need to be increased, costs reduced?
please show working. thanks
Explanation / Answer
Particulars 1st QTR 2nd QTR 3rd QTR 4th QTR
Sales (units) 1500 1700 1900 2100
Sales price 50 50 50 50
sales revenue 75000 85000 95000 105000
cash sales 22500 25500 28500 31500
credit sales 52500 59500 66500 73500
Finished goods
inventory (Units) 680 760 840 920
Total unit produces 2180 2460 2740 3020
( unit sold + closing inventory)
Direct material cost 17440 19680 21920 24160
Cash budget for the 2017
Particulars 1st QTR 2nd Qtr 3rd Qtr 4Th qtr
sale released 71500 56700 63700 70700
Direct material paid 20208 19008 21248 23488
Direct labour 13952 15744 17536 19328
variable overhead 4360 4920 5480 6040
Fixed overhead 26780 26780 26780 26780
Capital expenditure 45000
variabile selling &
Admisistrative exp 1500 1700 1900 2100
salary 1800 1800 1800 1800
insurance 1200 1200 1200 1200
Income atx expenses 3500 3500 3500 3500
Total cash expenses 118300 74652 79444 84236
opening cash 39000 35000 35000 35000
Surpius / (deficit) (7800) (17952) (15744) (13536)
Minimum Cash Balance 35000 35000 35000 35000
Bank loan 43000 55000 52000 50000
Bank Interest 645 825 780
closing finished good 920 units
closing raw material $5520
closing creditors $7248
closing debtors $29400
Comment :- By observing the above cash flow we can say that the purchase of addtional manchinery had created a presure of the cash budget for this the unit had to take bank loan . Other than this also there is not the adequate cash flow in the opearting system. the unit should try to increase their sales and adopte measures to reduced cost.
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