Tracom Ltd. produces travel packs for airlines that include a blanket and an inflatable neck pillow. The primary raw materials are fleece and plastic. Other raw materials are insignificant in cost and are included in variable manufacturing overhead. Gary Wood, Tracom controller, is currently preparing a master budget for 2018. Wood has gathered the following information:
1. Tracom’ projected Balance Sheet as at December 31, 2017 is as follows:
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Projected Balance Sheet
As at December 31, 2017
Cash $ 3,200
Accounts Receivable 16,200
Prepaid advertising 5,400
Raw material – Plastic (209 metres) 418
Finished Goods Inventory (1,560 units) 9,500
Total Current Assets 34,718
Non Current Assets
Plant & Equipment (net of Accumulated Depreciation) 185,100
Total Assets $ 219,818
Liabilities and Shareholders’ Equity
Accounts payable ($750 for fleece: $409 for plastic) $ 1,159
Common Stock 40,000
Retained Earnings 178,659
Total Liabilities and Shareholders’ Equity $219,818
2. Sales in the 4th quarter of 2017 are projected to be 10,000 units. The sales manager predicts that over the next two years, sales will grow by 400 units each quarter over the previous quarter. For example, sales in the first quarter of 2018 are expected to be 10,400 units.
3. Tracom sales history indicates that 90 percent of all sales are on credit with the remainder of sales in cash. The company’s collection experience shows that 85 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 15 percent are collected in the following quarter. (For simplicity, assume the company is able to collect 100 percent of its accounts receivable.)
4. The travel packs sell for $8 and this price is expected to hold constant through the first three quarters of 2018 and increase to $9 in the fourth quarter of 2018.
5. Tracom’s production manager attempts to end each quarter with enough finished goods inventory to cover 15 percent of the following quarter’s sales.
6. Tracom purchases fleece on a just in time basis, therefore, period end fleece inventory equals zero. The company wants to purchase sufficient plastic to ensure an ending inventory of plastic equal to 10 percent of the amount needed to satisfy the next quarter’s production requirements. All of Tracom direct material purchases are made on account. Eighty 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.
7. Budgeted variable manufacturing costs, per unit, are as follows:
Fleece: .75 metres @ $3 per metre $ 2.25
Plastic: .20 metres @ $2 per metre .40
Direct Labour: 5 minutes @ $18 per hour 1.50
Variable overhead: 5 direct labour minutes x 9.00 per hour .75
8. Fixed manufacturing overhead is incurred evenly throughout the year and is budgeted at $50,000 for the year. Budgeted fixed manufacturing overhead of $50,000 includes $8,000 for depreciation on machinery and equipment.
9. Variable manufacturing costs and fixed manufacturing costs, excluding depreciation, are paid for as incurred.
10. Tracom’s quarterly fixed selling and administrative expenses are $14,700 per quarter for the first 2 quarters and $12,000 for the last 2 quarters. Included in the $14,700 is $2,700 ($900 per month) for print advertising in an airline journal. Tracom paid the airline journal for 6 months of advertising, which will start in January 2018, in December 2017. All other selling and administration expenses are paid for as incurred.
11 Wood anticipates that dividends of $1,000 will be declared and paid each quarter.
12. Tracom’ management has made a decision to purchase a state of the art industrial sewing station costing $30,000 at the beginning of December 2018. It will take approximately six weeks to train personnel on the new machine, therefore, it is not anticipated that the machine will be used in production until 2019. The purchase will be paid for in cash.
13. Tracom wishes to maintain a minimum cash balance of $3,000. Management has negotiated an operating line of credit with its bank. The line of credit is for a maximum of $50,000 and bears an interest rate of 8% per annum. Assume that borrowings are made at the beginning of the quarter in which there is a cash shortage and all repayments are made at the end of the quarter of repayment. Interest is paid only at the time principal is repaid and repayments of principal are to be made in multiples of one thousand dollars.