Jay Rexford, president of Photo Artistry Company, was just concluding a budget m
ID: 2509912 • Letter: J
Question
Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x4, and the group was discussing preparation of the firm’s master budget for 20x5. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”
In response to a question about financing the acquisition, Rexford replied as follows: “The robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be purchased. We’ll finance these purchases with a one-year $1,000,000 loan from Shark Bank and Trust Company. I’ve negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well.” With that the meeting broke up, and the budget process was on.
Photo Artistry Company is a manufacturer of metal picture frames. The firm’s two product lines are designated as S (small frames; 5 × 7 inches) and L (large frames; 8 × 10 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Each S frame requires a 2-foot metal strip; an L frame requires a 3-foot strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Photo Artistry’s controller, is in charge of preparing the master budget for 20x5. She has gathered the following information:
Sales in the fourth quarter of 20x4 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x5 are expected to be 55,000 units.
Photo Artistry’s sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company’s collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the following quarter. (For simplicity, assume the company is able to collect 100 percent of its accounts receivable.)
The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x5.
The production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter’s sales. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarter’s production. Since metal strips are purchased locally, the company buys them on a just-in-time basis; inventory is negligible.
All direct-material purchases are made on account, and 80 percent of each quarter’s purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.
The predetermined overhead rate is $10 per direct-labor hour. The following production-overhead costs are budgeted for 20x5.
Prepare Photo Artistry Company’s sales budget for Q4(20x4) and 20x5.
Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x4, and the group was discussing preparation of the firm’s master budget for 20x5. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”
20x5 20x4 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 S frame unit sales x S sales price S frame sales revenue L frame unit sales x L sales price EL frame sales revenue Total sales revenue $ $ 0 0 $ $ 0 0 $ $ 0 0 $ $ 0 0 $ $ 0 0 $ $ Cash sales* Sales on accountt *40% of total sales. 160% of total sales.Explanation / Answer
20x4 20x5 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year S frame unit sales 50000 55000 60000 65000 70000 250000 x S sales price 10 10 10 10 10 10 S frame sales revenue 500000 550000 600000 650000 700000 2500000 L frame unit sales 40000 45000 50000 55000 60000 210000 x L sales price 15 15 15 15 15 15 L frame sales revenue 600000 675000 750000 825000 900000 3150000 Total sales revenue 1100000 1225000 1350000 1475000 1600000 5650000 Cash sales* 440000 490000 540000 590000 640000 2260000 Sales on account** 660000 735000 810000 885000 960000 3390000 *40% of total sales **60% of total sales
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