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Case 9-47 Comprehensive Master Budget; Short-Term Financ- ing: Acquisition of Robotic Equipment (to 9-2, 9-3, 9-5, 9-6) 1. Total sales revenue, entire year $5.650,000 3. Production budget, S frames, units to be produced entire year: 254,000 7. Cost of goods sold: $3,850,000 10. Totai assets: $9,634.700 m Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firm's master budget for 20x1. "I've decided to go ahead and purchase the industrial robot we've been talking about. We'll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment." In response to a question about financing the acquisition, Vaughn replied as follows: "The robot will cost $1,000,000. We'll finance it with a one-year $1,000,000 loan from Shark Bank and Trust Company. I've negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well." With that the meeting broke up, and the budget process was on. Frame-It Company is a manufacturer of metal picture frames. The firm's two product lines are designated as S (small frames, 57 inches) and L (large frames, 810 inches). The primary raw materials are flexible metal strips and 9 -inch by 24 -inch glass sheets. Each S frame requires a 2 -foot metal strip; an L frame requires a 3 -foot strip. Allowing for normal breakage and scrap glass, Frame-It can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Frame-It's controller, is in charge of preparing the master budget for 201. She has gathered the following information: 1. Sales in the fourth quarter of 200 are expected to be 50,000S frames and 40,000L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x1 are expected to be 55,000 units. 2. Frame-It's sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company's collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the following quarter. (For simplicity, assume the company is able to collect 100 percent of its accounts receivable.) 3. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 201. 4. Frame-It's production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter's sales. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarter's production. Since metal strips are purchased locally, Frame-It buys them on a just-intime basis; inventory is negligible. 5. All of Frame-It's direct-material purchases are made on account, and 80 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. 6. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible. 8. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 201. All of these costs will be paid in cash during the quarter incurred except for the depreciation charges. 9. Frame-It's quarterly selling and administrative expenses are $100,000, paid in cash. 0. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter. 1. Frame-It's projected balance sheet as of December 31,200, follows: Required: Prepare Frame-It Company's master budget for 20x1 by completing the following schedules and statements. 1. Sales budget: 2. Cash receipts budget: Cash sales Cash collections from credit sales made during current quarter Cash collections from credit sales made during previous quarter' Total cash receipts '80\% of current quarter's credit sales. 120% of previous quarter's credit sales. (2) Drodintinn hurmat , 4. Direct-material budget: Metal strips: S frames to be produced Metal quantity per S unit ( (t.) Needed for S frame production .... L frames to be produced Metal quantity per L unit ( ft.) Needed for L frame production Total metal needed for production; to be purchased ( t.) Price per foot Cost of metal strips to be purchased Glass sheets: S frames to be produced Glass quantity per S unit (sheets) Needed for S frame production L frames to be produced Glass quantity per L unit (sheets) Needed for L frame production Total glass needed for production (sheets) Add: Desired ending inventory Total glass needs Less: Expected beginning inventory Glass to be purchased Price per glass sheet Cost of glass to be purchased Total raw-material purchases (metal and glass) 5. Cash disbursements budget: Raw-material purchases: Cash payments for purchases during the current quarter Cash payments for purchases during the preceding quarter Total cash payments for raw-material purchases Direct labor: Frames produced ( S and L ) Direct-labor hours per frame Direct-labor hours to be used Rate per direct-labor hour Total cash payments for direct labor Production overhead: Indirect material Indirect labor Other Total cash payments for production overhead Cash payments for selling and administrative expenses Total cash disbursements 6. Summary cash budget: Cash receipts (from schedule 2) Less: Cash disbursements (from schedule 5) Change in cash balance due to operations Payment of dividends Proceeds from bank loan (1/2/1) Purchase of equipment Quarterly installment on loan principal Quarterly interest payment Change in cash balance during the period Cash balance, beginning of period Cash balance, end of period 7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 201. (Hint: In the budget, actual and applied overhead will be equal.) 8. Prepare Frame-It's budgeted income statement for 20x1. (Ignore income taxes.) 9. Prepare Frame-It's budgeted statement of retained earnings for 201. 10. Prepare Frame-It's budgeted balance sheet as of December 31,201

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