Storm Tools has formed a new business unit to produce battery-powered drills. Th
ID: 2461268 • Letter: S
Question
Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000). The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month. The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production. The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material. Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred. Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales). Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget. Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000). The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month. The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production. The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material. Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred. Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales). Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget.Explanation / Answer
Answer a. Sales Budget Jan Feb March Sale of drills in nos 20,000 25,000 30,000 SP per drill 100 100 100 Sales in $ 2,000,000 2,500,000 3,000,000 Cash Sales through websites 1,000,000 1,250,000 1,500,000 Credit Sales through retailers 1,000,000 1,250,000 1,500,000 Schedule of Cash Collections Jan Feb March Cash Sales through websites 1,000,000 1,250,000 1,500,000 Collections From retailers Jan Sales 400,000 600,000 Feb Sales 500,000 750,000 March Sales 600,000 Total Collections 1,400,000 2,350,000 2,850,000 Answer b. Production Budget Jan Feb March Production Per Month in units 25000 27500 30000 Answer c. Direct Material Purchase & Payment Budget Jan Feb March Direct material in $ Required per Unit 40 40 40 Total Direct Material Costs 1,000,000 1,100,000 1,200,000 Add: Closing Stock 275,000 300,000 325,000 Total needs 1,275,000 1,400,000 1,525,000 Less: Opening Stock - (275,000) (300,000) Total purchase of Direct Materials 1,275,000 1,125,000 1,225,000 Payment for Direct Material - 1,275,000 1,125,000 Answer d. Direct Labor Budget Jan Feb March DLH required per drill 20 Min. 20 Min. 20 Min. Total DLH required 8,333 9,167 10,000 Lab. Rate Per Hr. 24 24 24 Total Direct Labor in $ 200,000 220,000 240,000 Answer e. Factory Overhead Budget Jan Feb March Variable Factory Overhead per DLH 9 9 9 Total variable Overhead 75000 82500 90000 Fixed Overhead Depreciation 15000 15000 15000 Other 10000 10000 10000 Total Fixed Overhead 25000 25000 25000 Total Overhead 100000 107500 115000 Answer f. Ending finished Goods Budget Jan Feb March Op. Stock - 5,000 7,500 Production 25,000 27,500 30,000 Total Units for sales 25,000 32,500 37,500 Sales in Units 20,000 25,000 30,000 No. oF drills in Finished Stock 5,000 7,500 7,500 Direct material Cost 200,000 300,000 300,000 Direct Labor Costs 40,000 60,000 60,000 Factory Overhead (11.73 per Unit) 58,650 87,975 87,975 Total Cost of Finished Goods 298,650 447,975 447,975 Answer g. Selling, General & Admnistrative Cost Budget Jan Feb March Fixed Costs Salaries 100,000 100,000 100,000 Office 40,000 40,000 40,000 Advertising 75,000 75,000 75,000 Variable Components (15% od Sales) 300,000 375,000 450,000 Tortal SG&A Cost 515,000 590,000 665,000 Answer h. Cash Budget Jan Feb March Opening cash Balance 500,000 1,050,000 1,172,500 Add: receipts Collection from Customers 1,400,000 2,350,000 2,850,000 Total Cash available 1,900,000 3,400,000 4,022,500 Less: Disbursements Cash Disbursement - Direct Material - 1,275,000 1,125,000 Direct Labor 200,000 220,000 240,000 Factory overhead Fixed 10,000 10,000 10,000 Variable 75000 82500 90000 Selling & Admn. Exp. 515,000 590,000 665,000 Repayment of notes payable 50,000 50,000 50,000 Total Disbursement 850,000 2,227,500 2,180,000 Cash Balance Closing 1,050,000 1,172,500 1,842,500
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