Question

Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	38,000	October	28,000
August	86,000	November	14,500
September	55,000	December	15,000

The selling price of the beach umbrellas is $13 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $455,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.

4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30	90,400	feet
September 30	?	feet

5. Gilden costs $0.60 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $48,390.

Required:

1. Calculate the estimated sales, by month and in total, for the third quarter.

2. Calculate the expected cash collections, by month and in total, for the third quarter.

3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Answer 1

1	Estimated sales
				July	August	September	Total
	Units estimated		a	38000	86000	55000	179000
	Selling price per unit		b	13	13	13	13
	Budgeted sales		a*b	494000	1118000	715000	2327000
2	Expected cash collections:
				July	August	September	Total
	Budgeted sales			494000	1118000	715000	2327000
	Collection pattern
	30% in the month of sale			148200	335400	214500
	65% in the following month			295750	321100	726700
				(455000*0.65)	(494000*0.65)	(1118000*0.65)
	Total collections			443950	656500	941200	2041650
3	Beach umbrellas to be produced:
				July	August	September	October
	Units estimated			38000	86000	55000	28000
	Add: Ending finished goods inventory			12900	8250	4200	2175
	(Next month sales*15%)			(86000*15%)	(55000*15%)	(28000*15%)	(14500*15%)
	Total units required			50900	94250	59200	30175
	Less: Beginning Finished goods inventory			5700	12900	8250	4200
	(This month sales*15%)			(38000*15%)	(86000*15%)	(55000*15%)	(28000*15%)
	Umbrellas to be produced			45200	81350	50950	25975
4	Gilden needs to be purchased:
				July	August	September	Total
	Umbrellas to be produced			45200	81350	50950	177500
	Gilden required (In feet) per umbrella			4	4	4
	Gilden required in total			180800	325400	203800	710000
	Add: Ending inventory			162700	101900	51950
	(Next month production needs*50%)			(325400*50%)	(203800*50%)	(25975*4*50%)
				343500	427300	255750
	Less: Beginning inventory			90400	162700	101900
	(This month production needs*50%)			(180800*50%)	(325400*50%)	(203800*50%)
	Gilden needs to be purchased			253100	264600	153850	671550
5	Cost of raw material purchases:
				July	August	September	Total
	Gilden needs to be purchased			253100	264600	153850	671550
	Cost per foot			0.6	0.6	0.6
	Cost of raw material purchases			151860	158760	92310	402930
6	Expected cash disbursements:
				July	August	September	Total
	Cost of raw material purchases			151860	158760	92310	402930
	Disbursement pattern:
	One-half in the month of purchase			75930	79380	46155
	One-half in the following month			48390	75930	79380
				(Given)
	Total disbursements			124320	155310	125535	405165