FINA 6014 Assignment #2
4. Celebration Inc. manufactures and distributes assorted juices throughout Latin America.
Three (3) ounces of secret ingredient [XK3] is needed to produce each unit of CeleJuice, one of the company’s products. The company is planning raw material needs for the 3rd quarter (important as it is the quarter where CeleJuice sales is at its peak.
The company has the following inventory requirements:
a. Finished goods inventory on hand at the end of each month must be equal to 3,750 bottles of CeleJuice, plus 20% of the next month’s sales.
b. The finished Goods inventory on June 30th is budgeted to be 12,500 units.
c. The company does not maintain an inventory of work-in-progress.
d. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials.
e. The raw material inventory on June 30th is budgeted to be 67,500 ounces of [XK3].
Budgeted Sales units:
1. Prepare a production budget for CeleJuice for the months of July to October. (10 Marks)
2. Based on the production budget you prepared in part 1, explain why the company will produce more units than it sells in July and August, and fewer than it sells in September and October. (4 Marks)
5. Collectors Paradise is a retailer that sells stationery and office supplies. The company is planning its cash needs for the third quarter. Historically, Collector’s has had to borrow money during the third quarter to support peak sales of its products, which occur during August.
The following information has been assembled to assist in preparing a cash budget for the quarter.
i. Budgeted monthly (absorption costing) income statements for July to October are:
July August September October
Sales $40,000 $70,000 $50,000 $45,000
Cost of Goods sold 24,000 42,000 30,000 27,000
Gross Margin 16,000 28,000 20,000 18,000
Selling & Admin Exps:
Selling expense 7,200 11,700 8,500 7,300
Administrative expense 5,600 7,200 6,100 5,900
Total S&A expenses 12,800 18,900 14,600 13,200
Net Operating Income $ 3,200 $ 9,100 $ 5,400 $ 4,800
*Includes $2,000 depreciation each month
ii. Sales are 20% cash and 80% credit.
iii. Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% I the month following sale, and 20% in the second month following the sale. May sales totaled $30,000, and June sales totaled $36,000.
iv. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable for inventory purchases at June 30 total $11,700.
v. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000.
vi. Land costing $4,500 will be purchased in July.
vii. Dividends of $1,000 will be declared and paid in September.
viii. The cash balance on June 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month
ix. The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.
Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. (20 marks)
6. Academy Associates is reeling from a decline in profits because of competition. For its most recent year end, its financial controller has prepared following variance analysis and concluded that the company has done very well controlling its costs:
Budgeted Actual Variance
Professional Labour $1,000,000 $ 940,000 $ 60,000 F
Travel 50,000 40,000 10,000 F
Supplies 100,000 90,000 10,000 F
Professional Labour 400,000 405,000 (5,000) U
Facilities Cost 250,000 265,000 (15,000) U
Insurance 80,000 78,000 2,000 F
Totals $1,880,000 $1,818,000 $ 62,000 F
For the year Academy Associates projected (budgeted) that it would generate $2,000,000 in revenues; it generated $1,800,000. In this case sales ($) are the activity. The company has consulted with you for help in understanding what is happening. You decide to address the following items.
a) What is the major weakness in the report above and, how do you recommend addressing it? (2 marks)
b) Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation. (2 marks)
c) Academy Associates uses a management by exception philosophy. Use the report you prepared in (b) above to identify and explain which costs are likely to receive additional (2 marks)