Discussion Case
Budgeting for Production and Cash Flow
You are the president of Campus Sweaters, Inc. Campus Sweaters manufactures wool pullover V-neck sweaters of various sizes and colors. You are preparing budgets for the first quarter of 2017 ( Jan, Feb, and Mar). You have the following historical and projected sales in units:
Actual November 9,000
Actual December 8,000
Projected January 11,000
Projected February 10,000
Projected March 6,000
Projected April 7,000
Projected May 7,000
Projected June 7,000
It takes 10 skeins of yarn to make one sweater. Each skein costs $1.30. Past experience shows you need to have enough sweaters on hand to fill the next month and one half of sales (approximately 45 days). Also, you need enough yarn to manufacture the next month’s production.
You will have 12,000 in finished inventory and 80,000 skeins of yarn in raw materials inventory as of December 31, 2016. You purchased $90,000 of yarn in December 2016 that must be paid for in January. The Company incurred $7,500 of overhead cost during December, 2016 and $13,500 of selling expenses in the last half of December. These also must be paid in January. The company policy is to pay prior month charges on account on the 10th day of the following month unless otherwise designated.
Income Statements
Actual Actual Project. Project. Project.
Nov. Dec. Jan Feb. Mar
Sales $240,000 $270,000 $300,000 $270,000 $210,000
Cost of sales 144,000 162,000 180,000 162,000 126,000
Gross margin 96,000 108,000 120,000 108,000 84,000
Operating Expenses:
Selling 24,000 27,000 30,000 27,000 21,000
Administration 35,000 45,000 50,000 45,000 30,000
Rent 10,000 10,000 10,000 10,000 10,000
Sales salaries 20,000 20,000 20,000 20,000 20,000
Totals 89,000 102,000 110,000 102,000 81,000
Operating Income 7,000 6,000 10,000 6,000 3,000
Interest Expense 0 0 ? ? ?
Net Income $7,000 $6,000
A worker, using a knitting machine, can make five sweaters in an hour. The cost of direct labor per hour, including fringe, is $20.00. You incurred $13,000 of direct labor cost between December 16 and December 31,2015 which will be paid on January 7th. Manufacturing overhead rate is $5.00 per direct labor hour. All sweaters are wholesaled to retail outlets at $30.00 each.
Salaries and wages are paid as follows: 1st- 15th are paid on the 22nd day of each month; 16th-31st are paid on the 7th day of the following month. Rent is paid in advance on the first day of each month. Fifty percent of the selling expenses are paid in the month incurred and fifty percent in the following month. All manufacturing overhead and administrative costs are paid on the 10th day of the following month. The cash in the bank on December 31, 2016 was forecast at $30,000. There were no outstanding borrowings. The company has a $500,000 line of credit at 12% per annum at the Old Rusty Bucket State Bank of Oreana. All borrowings, and any subsequent repayments, must be made on the 15th day of the month. All loan takedowns must be repaid by December 31, 2017
. Repayments can be made when extra cash is available but on the 15th day of any month. The company has the policy to have at least $25,000 in the bank account at the end of each month even if they have to borrow it. However, more may be required depending on cash needs during the first week of the following month.
Twenty percent of the sales are collected in the month of sale. Seventy percent are collected in the next month and five percent are collected in the third month.
The company plans to purchase three new knitting machines for cash on February 1, 2017 in the amount of $60,000.
Required:
- Prepare a production budget for Campus Sweaters, Inc. for each month: January, February, March, 2017
- Prepare a raw materials budget for each month
- Prepare a raw materials budget in dollars for each month
- Prepare a cost of goods manufactured schedule for each month.
- Prepare a cash budget for each month.
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