1 answer

10. Understanding Relationships, Master Budget, Comprehensive Review Optima Company is a high-technology organization that produces a...

Question:

10.

Understanding Relationships, Master Budget, Comprehensive Review
Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima's system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter's activity and the activity for the year in total. The master budget will be based on the following information:
* Fourth-quarter sales for 20X0 are 55,000 units.
* Unit sales by quarter (for 20X1) are projected as follows:
c.   First quarter   d.   65,000   e.   f.
g.   Second quarter   h.   70,000   i.   j.
k.   Third quarter   l.   75,000   m.   n.
o.   Fourth quarter   p.   90,000   q.   r.
   s.   The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.
* There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:
u.   First quarter   v.   13,000 units   w.   x.
y.   Second quarter   z.   15,000 units   a.   b.
c.   Third quarter   d.   20,000 units   e.   f.
g.   Fourth quarter   h.   10,000 units   i.   j.
   k.   Each mass-storage unit uses 5 hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.
* There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter's unit sales. Optima will end the year with the same amount of direct materials found in this year's beginning inventory.
* Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.
* Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year's total fixed overhead by the year's budgeted production in units.
* Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
* Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.
* Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
* The balance sheet as of December 31, 20X0, is as follows:
s.   Assets              
t.   Cash       u.   v.   $ 250,000   w.
x.   Direct materials inventory       y.   z.   5,256,000   a.
b.   Accounts receivable       c.   d.   3,300,000   e.
f.   Plant and equipment, net       g.   h.   33,500,000   i.
j.         Total assets       k.   l.   $42,306,000   m.
   n.  
o.   Liabilities and Stockholders’ Equity              
p.   Accounts payable       q.   r.   $ 7,248,000*   s.
t.   Capital stock       u.   v.   27,000,000   w.
x.   Retained earnings       y.   z.   8,058,000   a.
b.         Total liabilities and stockholders’ equity       c.   d.   $42,306,000   e.
f.   * For purchase of direct materials only.              
   g.   Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.
Required:
Prepare a master budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included:

10. Pro forma income statement (using absorption costing). Enter amounts in full, not in thousands.(Note: Ignore income taxes.)

Optima Company
Pro Forma Income Statement
For the Year Ending December 31, 20X1

Choose One:

COGS

Income before taxes

Sales

$

Choose One:

Less; COGS

Less: Gross Margin

Less: Income before Taxes

Choose One:

COGS

Income before taxes

Sales

$

Choose One:

Less; Gross Margin

Less: Sales

Less: Selling & Admin Expenses

Choose One:

Gross Margin

Income before taxes

Sales

$

Answers

Production
First Quarter Second Quarter Third Quarter Fourth Quarter Total
Sales units 65000 70000 75000 90000 300000
Add : Desired Ending Inventory 13000 15000 20000 10000
Less : Beginning Inventory 0 13000 15000 20000
Units to be produced 78000 72000 80000 80000 310000

Fixed overhead per unit = 1,000,000 x 4 / 310000 = $12.90 per unit

Income Statement
Sales $     120,000,000
Cost of Goods Sold $        99,870,000
Gross Margin $        20,130,000
Selling and administrative expenses $          4,000,000
Income before taxes $        16,130,000
Cost of Goods Sold
Direct Material $        72,000,000 =300000*3*80
Direct Labor $        15,000,000 =300000*5*10
Variable Overhead $          9,000,000 =300000*5*6
Fixed Overhead $          3,870,000 =300000*12.9
Total Cost of Goods Sold $        99,870,000
Selling and administrative expenses
Variable $          3,000,000 =300000*10
Fixed $          1,000,000 =250000*4
Total Selling and administrative expenses $          4,000,000
.

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