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Problem 1

Lewis is a merchandising company. Each month they buy the inventory that they expect to sell the next month. Then they pay for it 50% in the month of purchase and 50% the next month. The purchase price is $50.

The sales commission is 6% and is paid in the month following the sales. Variable costs are 20% of sales and are paid 80% in the month incurred and 20% the following month.

Fixed costs are: Depreciation = $3,000 per month

Insurance = $1,200 per month paid on 1-1 and 7-1

Taxes = $800 per month and paid on 1-1.

Salaries = $12,000 per month paid when incurred

They plan on buying equipment for $10,000 in January and pay for it then.

The beginning cash balance is $10,000

Sales Price is $80 per unit. 10% of sales are cash and the rest credit. The collection pattern is: 30% in month of sale, 50% the next month and 20% two months later.

Sales

October, 2015= 8,000

November, 2015 = 9,000

December, 2015 = 10,000

January, 2016 = 9,000

February, 2016 = 8,000

March, 2016 = 8,500

April, 2016 = 10,000

 

Prepare a cash budget for the first quarter of 2016. If a loan is needed, a line of credit has been established at the bank. The loan would be taken out on the first of the month and repaid at the end of the month when all can be paid. The rate is 6%.

Sales

October, 2015= 8,000 x 80 =640,000

November, 2015 = 9,000 x 80 = 720,000

December, 2015 = 10,000 x 80 =800,000

January, 2016 = 9,000 x 80 = 720,000

February, 2016 = 8,000 x80 = 640,000

March, 2016 = 8,500 x80 =680,000

April ,2016 = 10,000 x80 =$800,000

 

December: Cash sales = .1 x $800,000= $80,000

+ from October: .9 x $640,000 x .2 = 115,200

+ from November: .9 x $720000 x .5 = 324,000

+ from December: .9 x $800,000 x.3 =  216,000    Total = $735,200

 

January: Cash sales = .1 x $720,000= $72,000

+ from November: .9 x $720,000 x .2 = 129,600

+ from December: .9 x $800000 x .5 = 360,000

+ from January: .9 x $720,000 x.3 =  194400    Total = $756,000

 

February: Cash sales .1 x $640000 = $64,000

+ from December: .9 x $800000 x.2 = 144000

+ from January: .9 x $720,000 x .5 = 324,000

+ from February: .9 x $640,000 x.3 =  172,800   Total = $704,800

 

March: Cash Sales .1 x $680,000 = $68,000

+ from January: .9 x $720,000 x.2 = 129,600

+ from February: .9 x $640,000 x .5 = 288,00

+ from March: .9 x $680,000 x.3 = 183600  Total = $669,200

 

Purchases

January: Cash purchases = .5 x 9000 x $50= $225,000

+ from December: .5 x 10,000 x $50 =  250,000    Total = $475,000

 

February: Cash purchases = .5 x 8000 x $50= $200,000

+ From January: .5 x 9000 x $50 = 225,000    Total = $425,000

 

March: Cash purchases = .5 x 8500 x $50= $212,500

+ From February: .5 x 8000 x $50 = 200,000    Total = $412,500

 

Variable costs

January: .2 x $756,000 x.8 = $120,960

+ From December: .2 x $735,200 x .2 = 29,408     Total = $150,368

 

February: .2 x $704,800 x .8 = $140,960.80

+ From January: .2 x $756,000 x .2 = 30,240    Total = $171,200.80

 

March: .2 x $669,200 x.8 = $107,072

+ From February: .2 x 704,800 x .2 = 28,192    Total = $135,264

 

 

 

 

CASH BUDGET
FOR THE THREE MONTHS ENDING JUNE 30
 January  February  March  Total
Cash balance      10,000      133,632        225,231       10,000
Add receipts    756,000      704,800        669,200   2,130,000
Total receipts    766,000      838,432        894,431   2,140,000
Less Disbursements
   Merchandise purchases    475,000      425,000        412,500   1,312,500
variable    130,368      171,201        135,264      436,833
   fixed        3,000         3,000           3,000         9,000
Insurance        1,200         1,200           1,200         3,600
Taxes          800            800              800         2,400
Salaries      12,000       12,000         12,000       36,000
Equipment purchase      10,000
Total Disbursements    632,368      613,201        564,764   1,800,333
Excess (deficiency) of receipts
   over disbursements    133,632      225,231        329,667      339,667

 

 

 

 

Problem2.

The sales forecast for Moss follows:

January = 5,000

February = 5,200

March = 5,600

April = 6,000

May = 6,500

June = 7,000

July = 7,500

August = 7,000

 

Company policy is to keep a target ending inventory of 20% of the next month’s sales. Prepare a production budget for April, may and June,

 

 

Moss

Production budget

April                  May                 June

Target Ending Inventory         1300                1400               1500

Sales                                               6000                6500               7000

Needs                                             7300                7900               8500

Beginning Inventory                -1200               -1300             -1400

Planned production                  6100                6600               7100

 

 

Using the information from problem 2, prepare a labor usage and purchases budget. It requires 3 hours at $18 per hour.

 

Labor usage and purchases budget

Planned production 5000 5200 5600 6000 6500 7000 7500 7000
× Direct labor hours per unit 3 3 3 3 3 3 3 3
Budgeted direct labor hours 15000 15600 16800 18000 19500 21000 22500 21000
× Cost per direct labor hour 18 18 18 18 18 18 18 18
Budgeted direct labour hours $270,000 280800 302400 324000 351000 378000 405000 378000

 

 

Problem 3: Special order

 

Oliver is currently selling 9,800 units and their maximum capacity is 10,000. The normal selling price is $250, variable manufacturing costs are $125 and the normal sales commission is 10% of selling price. Fixed costs are $500,000. They are approached regarding a special order for 200 units at a price of $155. None of their current customers will be affected and the sales commission will be 10% of the sales price. What effect will this have on income?

 

Answer:

SP = 155

VE = 125

CM = 30    x 200 = $6,000 – $5,000 = $1,000

Sales commission 10% of the sales price = 10% of 250 = $25 per unit

Total sales commission = $25 x 200 units = $5000

 

Income will increase by $1000

 

Now suppose the company policy is that the sales commission on a special order is a flat $2,000 but a special machine must be rented at a cost of $3,000 per year and the offered price is $135. What effect would this have on income?

 

Answer:

SP = 135

VE = 125

CM = 10    x 200 = $2,000 – $3,000 -$2000 = $3,000 loss

Income will decrease by $3000

 

Finally, suppose the original facts but the current demand is 9,700 and the order is 400 or nothing. What is the effect on income?

Answer:

Make the $1,000 above, but gain 100 regular sales. The CM is $250 minus 125 and 25 for the commission = $100. So the gain profit is 100 times x $100 = $10,000. There will be an increase in revenue by $10,000.

 

 

Problem 4

Currently Schultz makes a lawnmower and also makes the engine that is used for this model. The current demand is 10,000 units but Schultz can only make 9,000 because it takes 4 hours on a special machine to make the mower and they have only 36,000 hours available. It takes 1 hour of the total to make the engine and 3 hours to make the rest of the mower. An employee has suggested we consider buying the engine instead of making it as this would free 9,000 x 1 = 9,000 hours and that would allow us to make 9,000 / 3 = 3,000 more mowers. Considering the information below, determine our current income and the income if we bought the engine. We will buy all or none of the engines needed.

 

Cost of Lawnmower

Direct Materials = $600 ($90 for engine)

Direct Labor = $300 ($100 for engine)

Variable OH = $275 ($75 for engine)

Selling Price = $1,500

Fixed Costs = $2,800,000

Cost to buy engine = $300

Answer

Current income

Revenue (9000*$1,500)                                              $13,500,000

Variable cost (1175*9000)                                          $10,575,000

Fixed costs                                                                          $2,800,000           

Income                                                                                 $125,000

 

Income if engine is bought

Current income

Revenue (12000*$1,500)                                            $18,000,000

Variable cost (910*12000)                                          $10,920,000

Cost of engines (300*1200)                                        $3,600,000

Fixed costs                                                                          $2,800,000           

Income                                                                                 $680,000

 

How much could we afford to pay if we want to increase our income by $75,000?

 

Current income

Revenue (12000*$1,500)                                            $18,000,000

Variable cost (910*12000)                                          $10,920,000

Cost of engines (340*1200)                                        $4,080,000

Fixed costs                                                                          $2,800,000           

Income                                                                                 $200,000

We could afford to pay $4,080,000/1200 = $340

 

 

Problem 5

 

Owens is considering buying a new machine for $300,000. Using the following information determine the Net Present Value. The asset is bought on 1-1-2016.

 

The life of the machine is 8 years.

The asset will be depreciated as 5-year property.

Year 1 = 20%

Year 2 = 32%

Year 3 = 19.2%

Year 4 = 11.52%

Year 5 = 11.52%

Year 6 = 5.76%

 

The discount rate is 10%.

Other information

Revenues and expenses

Year                      Revenue             Variable                 Fixed

Expenses              Expenses          Income

            1        165,000         82,500       30,000       52,500
            2        170,000         85,000       30,000       55,000
            3        170,000         85,000       30,000       55,000
            4        175,000         87,500       30,000       57,500
            5        175,000         87,500       30,000       57,500
            6        170,000         85,000       30,000       55,000
            7        165,000         82,500       30,000       52,500
            8        160,000         80,000       30,000       50,000

 

The estimated salvage value is $15,000.

There is a major overhaul on 12-31-2020 that is deductible in 2020, The amount is $30,000.

 

 

 

 

Answer:

Yo-300,000 x 1.000 =       -300,000

Depreciation Tax Shield

Y1 165,000 x .2 x.3 = 9,900          X   .909 = 8999.10

Y2 170,000 x .32 x .3 = 16,320       X  .826  = 13,480

Y3 170,000 x .192 x .3 = 9792     X  .751 = 7,354

Y4 175,000 x .1152 x .3 = 6048    X   .683 = 4131

Y5 175,000 x .1152 x .3 = 6048    X   .621 = 3756

Y6 170,000 x .0576 x .3 = 2938    X   .564= 1657

Y7 165,000 x 1 x .3 = 49500            X   .513 = 25394

Y8 160,000 x 1 x .3 = 48000            X   .467= 22,416

Salvage Value

15,000 x.7 =                            10,500 x .467 = 4,904

Total                                                              $92,091

 

Cash flows

Y1 52500 X   .909                  = 47,723

Y2 55000       X  .826                         = 45430

Y3 55000     X  .751               = 41,305

Y4 57500    X   .683               = 39,273

Y5 (57500-30000) X   .621 = 17,078

Y6 55000    X   .564               = 31,020

Y7 52500            X   .513       = 26,933

Y8 50000            X   .467       = 23,350

Total                                      $272,112

 

Total present values =$92,091+$272,112 = $364,203

 

NPV = $364,203 – $300,000 =$64,203

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