Question

Gulf States Manufacturing has the following data from year 1 operations, which are to be used for developing year 2 budget estimates:

Sales revenues (14,000 units)	$	1,260,000
Manufacturing costs
Materials	$	225,000
Variable cash costs		307,000
Fixed cash costs		123,000
Depreciation (fixed)		151,000
Marketing and administrative costs
Marketing (variable, cash)		160,000
Marketing depreciation		39,000
Administrative (fixed, cash)		156,000
Administrative depreciation	$	14,000
Total costs	$	1,175,000
Operating profits	$	85,000

All depreciation charges are fixed. Old manufacturing equipment with an annual depreciation charge of $15,750 will be replaced in year 2 with new equipment that will incur an annual depreciation charge of $22,200. Sales volume and prices are expected to increase by 14 percent and 3 percent, respectively. On a per-unit basis, expectations are that materials costs will increase by 12 percent and variable manufacturing costs will decrease by 2 percent. Fixed cash manufacturing costs are expected to decrease by 9 percent.

Variable marketing costs will change with volume. Administrative cash costs are expected to increase by 10 percent. Inventories are kept at zero. Gulf States operates on a cash basis.

1.

value:
25.00 points

Required information

Required:

Prepare a budgeted income statement for year 2. (Do not round intermediate calculations.)

References

eBook & Resources

Financial StatementsLearning Objective: 13-04 Develop production and cost budgets.

Difficulty: 2 MediumLearning Objective: 13-06 Develop budgeted financial statements.

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2.

value:
25.00 points

Required information

Required:

Estimate the cash from operations expected in year 2. (Do not round intermediate calculations.)

Answer 1

1		Budgeted income statement
						$
	Sales revenues			(Note:1)		1479492
	Manufacturing costs:
	Materials			(Note:2)		287280
	Variable cash costs			(Note:3)		342980
	Fixed cash costs			123000*(100%-9%)		111930
	Depreciation (Fixed)			(Note:4)		157450
	Marketing and administrative costs:
	Marketing (Variable,cash)			(Note:5)		16279
	Marketing depreciation					39000
	Administrative (Fixed,cash)			156000*(100%+10%)		171600
	Administrative depreciation					14000
	Total operating expenses					1140519
	Net income					338973
	Note:1
	Units=14000*(100+14%)=14000*114%=15960
	Selling price for year 1=1260000/14000=$ 90 per unit
	Selling price for year 2=90*(100%+3%)=90*103%=$ 92.7
	Sales revenue=15960*92.7=$ 1479492
	Note:2
	Material cost per unit for year 1=225000/14000=$ 16.07
	Material cost per unit for year 2=16.07*(100%+12%)=$ 18
	Units=14000*(100+14%)=14000*114%=15960
	Materials cost for year 2=15960*18=$ 287280
	Note:3
	Variable cost per unit for year 1=307000/14000=$ 21.93
	Material cost per unit for year 2=21.93*(100%-2%)=21.93*98%=$ 21.49
	Units=14000*(100+14%)=14000*114%=15960
	Materials cost for year 2=15960*21.49=$ 342980
	Note:4
	Increase in depreciation due to replacement of equipment=22200-15750=$ 6450
	Depreciation (Fixed) for year 2=151000+6450=$ 157450
	Note:5
	Variable marketing cost per unit=160000/14000=$ 11.43
	Units=14000*(100+14%)=14000*114%=15960
	Variable marketing cost for year 2=15960*(100%+2%)=15960*102%=$ 16279
2	Cash from operations expected in year 2:
						$
	Net income					338973
	Add:
	Depreciation (Fixed)					157450
	Marketing depreciation					39000
	Cash from operations					535423
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