ASSIGNMENT TWO (Two problems printed on three pages)

Please submit as an email attachment by Noon, Sunday, August 9th. Please

show details of all calculations. Use judgment in rounding.

Problem 1

Pattie Jones, comptroller for X Ltd., has assembled the following data for the
preparation of the cash budget for the first quarter of 2015.

Sales:
Nov. ‘14 (actual) $120,000
Dec. ‘14 (actual) $150,000
Jan. ‘15 (est.) $165,000
Feb. ’15 (est.) $185,000
Mar. ’15 (est.) $190,000

Each month, 30% of sales are for cash and 70% are on credit. The collection
pattern for credit sales is 20% in the month of sale, 40% in the following
month, and 30% in the month after that. Ten-percent (10%) of credit sales are
never collected.

Information about merchandise inventory purchases is as follows:

Dec.’14 (actual) $80,000

Jan. ’15 (est.) $70,000
Feb. ’15 (est.) $85,000
Mar. ’15 (est.) $90,000

Inventory purchases are paid 30% in the month of purchase, 70% in the
following month.

Additional information:
1) As at January 1, 2015 the company reports a cash balance of $50,000.
2) A new truck will be acquired for $40,000 cash. An old truck will be sold for
expected cash proceeds of $14,000. Both transactions are expected to be
completed in January.
3) Monthly operating expenses are expected to total $55,000 (including
depreciation of $5,000). Monthly operating expenses are paid in the same
month in which they are incurred.

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4) Dividends of $45,000 will be declared in February, and are payable in
March.
5) Management receives a monthly cash bonus equal to 3% of the previous
month's total sales.
6) The company has a policy of maintaining a minimum cash balance of
$25,000.

Required
Prepare a monthly cash budget for the first quarter using a clear and logical
format. Include a column for each month and the quarter as a whole. An
Excel template has been posted, which you may use/adapt as you choose.

Problem 2

J Ltd. provides the following information for its first year (“Year 1”).

1. Sales were $4,400,000 for 400,000 units sold.

2. Direct materials were $800,000.
3. Direct labour was $400,000.
4. Manufacturing overhead was $240,000 (25% variable; 75% fixed).
5. Selling expenses were $260,000 (40% variable; 60% fixed).
6. Administrative expenses were $320,000 (30% variable; 70% fixed).

The company has a strict policy of “just in time” inventory – you may assume
that inventory levels are zero at the end of each period. You may also ignore
income taxes.

Required

A. How much was the actual variable cost per unit for Year 1? The actual
total cost per unit for Year 1?

B. How much was the actual contribution margin, per unit and in total, for
Year 1?

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C. How much was the net income for Year 1?

D. How many units above the breakeven point did the company actually sell
in Year 1?

E. The company has a target net income of $3,000,000 for Year 2, and
expects to sell 10% more units than in Year 1. It also expects that variable
costs per unit will be the same as in Year 1, but that total fixed costs will be
5% higher than in Year 1. How much must the total contribution margin be
for this target net income to be met in Year 2? How much must the
contribution margin per unit be for this target net income to be met in Year
2? How much must the selling price per unit be for this target net income
to be met in Year 2?

F. Answer this part independently. Please refer to the original data. The
company is considering the purchase of new equipment that would reduce
its direct labour costs to 70 cents per unit (from $1 per unit). If this
acquisition is made the total manufacturing overhead would still be
$240,000 but manufacturing overhead costs would be 10% variable and
90% fixed (instead of 25% and 75%, respectively). Assume that all other
variable costs per unit are the same, and that all other fixed costs are the
same in total. Also assume that the selling price per unit ($11) is
unchanged. If the acquisition is made, how much would the new
contribution margin per unit be? The new contribution margin ratio? The
new breakeven point in units and sales dollars? Would the new breakeven
point, in units and sales dollars, be higher or lower than the breakeven
point for Year 1? By how much, respectively?

END