You have been hired as a new accountant for Edge Company, a retailer.  They make and distribute earrings to various outlets in the city.  Their accountant has been fired, and their books are not properly organized.
Part I:
The manager of Edge would like to see a budget for the first quarter of 2015.  He gives you the following information:
Sales

Month

Actual sales

Month

Budgeted sales

October

20,000

January

65,000

November

26,000

February

100,000

December

40,000

March

50,000

 
 

April

30,000

 
 

May

28,000

 
 

June

25,000

Each earring sells for $ 10 per earring.  Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Sales are 10% for cash.  Out of the credit sales, 20% are collected in the month of sales and 75% are collected in the month following the sales.  5% are considered uncollectible.  The accounts receivable on the balance sheet are from December after discounts and other adjustments.  These will be collected in January.
Each earring requires 2 gms of metal.  It is difficult to ship the metal, and delays occur.  So Edge keeps 50% of the next month’s production in inventory.  Each gram of metal costs $ 0.50.  One half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month.
Each earring produced needs half hour of direct labor.  Direct labor rates are $ 6 per hour.
Variable manufacturing overheads are $ 0.75 per earring.  Fixed manufacturing overheads are applied based on direct labor hours.  Edge estimated $ 160,000 for the year based on 200,000 labor hours.  The fixed manufacturing costs are sunk costs.
All overhead expenses are paid for in cash in the month incurred.
Variable operating expenses are as follows:
Sales commissions 3% of sales
Advertising                2% of sales.
Other operating expenses for 50,000 units are $ 60,000; for 75,000 units it is $ 80,000.  This is a mixed cost.
Fixed operating expenses (calculated from the mixed costs above) are allocated as follows:
Rent                15%
Salaries         25%
Utilities         10%
Insurance      20%
Depreciation            30%
The company plans to buy $ 50,000(40 in example) in new equipment in February {in june}.  Dividend payments are $ 15,000 each quarter paid in March The effective tax rate is 25%
There is no minimum cash balance required. Cash on January 1 was $ 50,000.
Prepare for the first quarter of 2015: (three months and totals for the quarter)
·          Sales budget
·         Production budget
·         Purchases budget
·         Labor budget
·         Manufacturing overhead budget
·         Operating expenses budget
·         Capital budget
·         Cash collection budget
·         Cash budget
Use an Excel spreadsheet with linked numbers.
Part II:
The manager wants to know if sales would increase if he lowered the selling price to $ 9.50.  You consult with the sales department and come up with the following numbers:
Sales

Month

Actual sales

Month

Budgeted sales

October

20,000

January

70,000

November

26,000

February

106,000

December

40,000

March

52,000

 
 

April

31,000

 
 

May

30,000

 
 

June

25,000

Redo the budgets for the first quarter of 2015.  You should be able to change the sales numbers and have everything else changed.
Prepare the new budgeted income statement
Part III:
One of Edge’s sales managers is very excited.  He has been contacted for a special order – 10,000 earrings.  But the price that the buyer is willing to pay is only $ 7 per earring.  The manager asks you if this order should be accepted.
 
 
 


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