Hawkins Engineering’s management wants to prepare budgets forone of its products, GalaxyRS, for July 2019. The firm sells theproduct for $800 per unit and has the following expected sales (inunits) for these months in 2019:
April May June July August September
6,000 4,000 5,600 6,500 6,800 7,800
Typically, cash sales for Hawkins represent 20% of sales whilecredit sales represent 80%. Hawkins bills customers on the firstday of the month following the month of sale. Experience has shownthat 85% of the company’s billings will be collected during themonth of sale, 10% by the end of the month after the sale and 5%will ultimately be uncollectible.
The production process requires the following:
Standard Costs:
Galaxy-80 4lbs $1.25/lb
RS-360 2lbs $5.00/lb
Directlabor
Skill level1 0.01hours $50/hour
Skill level2 0.10hours $20/hour
Variable manufacturing overhead is budgeted at $1,200 per batch(of 100 units) plus $80 per direct labor hour. In addition tovariable overhead, the firm has a monthly fixed factory overhead of$60,000, of which $25,000 is depreciation expense. The firm paysall manufacturing labor and factory overhead when incurred.
The firm’s policy is to maintain an ending finished goodsinventory each month equal to 10% of the following month’s budgetedsales, but in no case less than 500 units. All materialsinventories are to be maintained at 5% of the production needs forthe next month, but not to exceed 1,000 pounds. The firm expectsall inventories at the end of June to be within the guidelines.
The purchase terms for materials are 3/10, n/30. Hawkings makesall payments within the discount period. Experience has shown that80% of the purchases are paid in the month of the purchase and theremainder are paid in the month immediately following. In June2019, the firm budgeted purchases of $30,000 for Galaxy-80 and$20,000 for RS-360.
Total budgeted marketing, distribution, customer service andadministrative costs for 2019 are 1,850,000. Ofthis amount, $1,200,000 is considered fixed and includesdepreciation expense of $150,000. The remainder varies with sales.The budgeted total sales for 2019 are $4 million. All marketing andadministrative costs are paid in the month incurred.
Additional information follows:
Cashbalance $40,000
Management desires to maintain an end-of-month minimum cashbalance of $40,000. The firm has an agreement with a local bank toborrow its short-term needs in multiples of $1,000 up to $100,000at an annual interest rate of 12%. Borrowings are assumed to occurat the end of the month. Bank borrowing at July 1 is $0.
Required:
On the basis of the preceding data and projections, prepare thefollowing budgets:
- Sales budget for July
- Production budget for July
- Production budget for August
- Direct materials used budget for July (in units anddollars)
