Optima Company is a high-technology organisation that produces amass-storage system. The design of Optima’s system is unique andrepresents a breakthrough in the industry. The units Optimaproduces combine positive features of both compact and hard disks.The company is completing its fifth year of operations and ispreparing to build its master budget for the coming year (2017).The budget will detail each quarter’s activity and the activity forthe year in total. The master budget will be based on the followinginformation:
a Fourth-quarter sales for 2016 are 65 000 units.
b Unit sales by quarter (for 2017) are projected as follows:
First quarter 75 000
Second quarter 80 000
Third quarter 85 000
Fourth quarter 95 000
The selling price is $500 per unit. All sales are credit sales.Optima collects 85% of all sales within the quarter in which theyare realised; the other 15% is collected in the following quarter.There are no bad debts.
c There is no beginning inventory of finished goods. Optima isplanning the following ending finished goods inventories for eachquarter:
First quarter 13 000 units
Second quarter 15 000 units
Third quarter 20 000 units
Fourth quarter 10 000 units

d Each mass-storage unit uses five hours of direct labour andthree units of direct materials. Workers are paid $25 per hour, andone unit of direct materials costs $80.

e There are 65 700 units of direct materials in beginninginventory as at 1 January 2017. At the end of each quarter, Optimaplans to have 30% of the direct materials needed for next quarter’sunit sales. Optima will end the year with the same amount of directmaterials found in this year’s beginning inventory.

f Optima buys direct materials on account. Half of the purchasesare paid for in the quarter of acquisition and the remaining halfare paid for in the following quarter. Wages and salaries are paidon the 15th and 30th of each month.

g Fixed overhead totals $1 million each quarter. Of this total,$350 000 represents depreciation. All other fixed expenses are paidfor in cash in the quarter incurred. The fixed overhead rate iscomputed by dividing the year’s total fixed overhead by the year’sbudgeted production in units.
HVariable overhead is budgeted at $6 per direct labour hour. Allvariable overhead expenses are paid for in the quarterincurred.
i Fixed selling and administrative expenses total $250 000 perquarter, including $50 000 depreciation.
j Variable selling and administrative expenses are budgeted at $10per unit sold. All selling and administrative expenses are paid forin the quarter incurred.
k The balance sheet as at 31 December 2017 is as follows:

ASSETS

Cash

$ 250 000

Direct materials inventory

5 256 000

Accounts receivable

3 300 000

Plant and equipment, net

33 500 000

Total assets

$42 306 000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable

$ 7248000*

Capital share

27 000 000

Retained earnings

8 058 000

Total liabilities and shareholders’ equity

$42 306 000

* For purchase of direct materials only.

l Optima will pay quarterly dividends of $300 000. At the end ofthe fourth quarter, $2 million of equipment will be purchased.

REQUIRED:

Prepare a master budget for Optima Company for each quarter of2017 and for the year in total. The following component budgetsmust be included:

1 Sales budget
2 Production budget
3 Direct materials purchases budget
4 Direct labour budget
5 Overhead budget
6 Selling and administrative expenses budget
7 Ending finished goods inventory budget
8 Cost of goods sold budget (Note: Assume that there is no changein work in process inventories.)
9 Cash budget
10 Pro forma income statement (using absorption costing) (Note:Ignore income taxes.)
11 Pro forma balance sheet (Note: Ignore income taxes.)