Chapter 8 227

• Set a maximum for gifts, and do not buy gifts for each other.
• Get permission from the other person before spending amounts over a
specific amount, such as $25.
• Reduce amounts spent on food; buy more vegetables and fruits rather than
meats and pastries.
• Vacation “on the cheap”—camping, visiting relatives, or enjoying home
town.
• Don’t buy “it” if cash cannot be paid for “it.”
• Put some money aside each pay period for savings.

17. a. Competitors’ actions are extremely important to business planning because

those actions will probably affect whether the planning company will
succeed in its planned activities. Competitors may decide to offer new
products, making other products obsolete; competitors may decide to enter
or expand their markets, creating a market decline for other companies;
competitors may lower prices, forcing others offering the same or similar
products to also lower product prices or increase advertising that would
explain higher prices to consumers.
b. Competitors’ actions may affect internal planning activities because of the
implications of those actions on sales and related production figures. Also,
actions such as “no-interest” installment promotions may impact sales and
collection patterns. Changes in products may require changes in production
technology or labor needs.
c. Other internal factors that will affect the budgeting process are marketing
promotions that are being planned, capital budgeting purchases and
payments, stock or bond issuances, new management strategies (such as
market entrances or departures), expansion or contraction of the company’s
sales force, and technological changes that could affect training needs.
Other external factors that will affect the budgeting process are interest rate
changes, war or threats of war, expansion or contraction of oil (or other raw
material) supplies, and changes in minimum-wage laws.

18. Business loans ($6,000,000  0.05) $300,000

Consumer loans ($4,000,000  0.11) 440,000
Investments ($1,600,000  0.045) 72,000
Total projected revenue $812,000

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228 Chapter 8

19. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
A 600,000 300,000 640,000 460,000
 $17  $16  $14  $12
$10,200,000 $ 4,800,000 $ 8,960,000 $5,520,000 $29,480,000
B 400,000 700,000 250,000 650,000
 $17  $16  $14  $12
$ 6,800,000 $11,200,000 $ 3,500,000 $7,800,000 $29,300,000
C 530,000 480,000 800,000 190,000
 $17  $16  $14  $12
$ 9,010,000 $ 7,680,000 $11,200,000 $2,280,000 $30,170,000
The most financially beneficial scenario would be C; however, given the large
discrepancies in sales quantities per quarter, Pataky Company may not be able to
smooth production activities over the year. There would need to be a large
inventory build-up for the third quarter, which would increase the costs of non-
value-added costs of moving and storing units. The extreme decline in fourth
quarter sales might result in layoffs, if other value-added activities could not be
developed for direct labor employees.
Scenario A might actually be a better situation because of the less dramatic
adjustments between quarters.

20. January February March

Budgeted sales 102,400 96,000 128,000
Ending inventory (5%) 4,800 6,400 7,680
Total required 107,200 102,400 135,680
Beginning inventory (7,000) (4,800) (6,400)
Budgeted production 100,200 97,600 129,280

21. QUARTER Total

st nd
1 2 3rd 4 th

Sales 1,080,000 1,360,000 980,000 1,100,000 4,520,000

EI (10%) 136,000 98,000 110,000 120,000 120,000
Total 1,216,000 1,458,000 1,090,000 1,220,000 4,640,000
BI (94,500) (136,000) (98,000) (110,000) (94,500)
Production 1,121,500 1,322,000 992,000 1,110,000 4,545,500

22. a. January February March April

Sales 300 700 1,000 900
EI 1,700 1,900 1,300 700
Total units needed 2,000 2,600 2,300 1,600
BI (1,000) (1,700) (1,900) (1,300)
Units produced 1,000 900 400 300

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Chapter 8 229

b. February March April

Units produced 900 400 300
Pounds of RM per unit 3 3 3
RM needed for production 2,700 1,200 900
EI 1,350 600 450
Pounds of RM needed 4,050 1,800 1,350
Pounds of RM in BI (1,500) (1,350) (600)
Pounds of RM to purchase 2,550 450 750
Cost per pound  $2.00  $2.30  $2.40
Cost of RM purchases $ 5,100 $ 1,035 $ 1,800
c. February March April
Units produced 900 400 300
DLHs per unit  10  10  10
Total hours 9,000 4,000 3,000
Cost per DLH  $12  $12  $12
Cost of DL $108,000 $48,000 $36,000

23. Sales of gowns 325,000

EI of gowns 15,800
Total 340,800
BI of gowns (21,000)
Production 319,800
319,800  2.5 yards = 799,500 yards
Yards needed for production 799,500
Ending inventory 4,550
Total 804,050
Beginning inventory (5,000)
Yards to purchase 799,050
Divided by yards in bolt ÷ 15
Necessary bolts 53,270

24. a. and b. Sales (feet) 190,000

EI 10,000
Total 200,000
BI (12,250)
Production 187,750

Concrete Gravel
Production in feet 187,750 187,750
Pounds per foot 4  7.5
Pounds for production 751,000 1,408,125
EI 34,300 46,250
Total pounds needed 785,300 1,454,375
BI (41,000) (32,650)
Purchase (pounds) 744,300 1,421,725
Cost per pound  $0.10  $0.04
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230 Chapter 8

Total cost $ 74,430 $ 56,869

25. a. Boxes Trays

Production budget
Units of sales 42,000 30,000
Units desired in ending inv. 1,800 650
Units needed 43,800 30,650
Units in beginning inv. (1,200) (800)
Budgeted production 42,600 29,850
b. Purchases budget—Material A
Pounds needed for production:
(42,600  2) + (29,850  1) = (85,200 + 29,850) 115,050
Desired ending inventory 1,500
Total requirements 116,550
Less beginning inventory (1,780)
Pounds to be purchased 114,770
Cost per pound  $0.05
Total cost of Material A purchases $5,738.50
Purchases budget—Material B
Pounds needed for production:
(42,600  1.5) + (29,850  0.8) = (63,900 + 23,880) 87,780
Desired ending inventory 1,400
Total requirements 89,180
Less beginning inventory (5,000)
Pounds to be purchased 84,180
Cost per pound  $0.07
Total cost of Material B purchases $5,892.60
Material purchases:
Material A 114,770 lbs. $ 5,738.50
Material B 84,180 lbs. 5,892.60
Total $11,631.10
c. Direct labor budget
Required hours: Boxes (42,600  0.3) 12,780
Trays (29,850  0.2) 5,970
Total DLHs 18,750
Average DL wage rate  $9.50
Total DL cost $178,125
d. Boxes Trays Total
Activity base (DLHs) 12,780 5,970
Multiplied by OH rate  $1.60  $1.60
Overhead applied $20,448 $9,552 $30,000

26. Cost of goods sold $600,000

Ending inventory 84,000
Beginning inventory (60,000)
Budgeted purchases $624,000

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Chapter 8 231

Monthly purchases: $624,000 ÷ 12 = $52,000

Payment for current year purchases ($52,000  11) $572,000
Beginning A/P balance 40,000
Total cash payments for purchases in 2014 $612,000

27. Sept. Oct. Nov.

Aug. credit sales (60%  $78,000  80%) $37,440
Sept. cash sales (40%  $80,000) 32,000
Sept. credit sales (60%  $80,000  20%) 9,600
Sept. credit sales (60%  $80,000  80%) $38,400
Oct. cash sales (40%  $95,000) 38,000
Oct. credit sales (60%  $95,000  20%) 11,400
Oct. credit sales (60%  $95,000  80%) $45,600
Nov. cash sales (40%  $91,000) 36,400
Nov. credit sales (60%  $91,000  20%) 10,920
Total collections $79,040 $87,800 $92,920

28. a. January February March

Nov. sales (30%  $83,000) $24,900
Dec. sales (30%  $76,000) 22,800
Dec. sales (30%  $76,000) $22,800
Jan. sales (40%  $79,000  99%) 31,284
Jan. sales (30%  $79,000) 23,700
Jan. sales (30%  $79,000) $23,700
Feb. sales (40%  $88,000  99%) 34,848
Feb. sales (30%  $88,000) 26,400
Mar. sales (40%  $59,000  99%) 23,364
Total collections $78,984 $81,348 $73,464
b. Feb. sales to be collected in April (30%  $88,000) $26,400
March sales to be collected in April (30%  $59,000) 17,700
March sales to be collected in May (30%  $59,000) 17,700
Total A/R balance at March 31 $61,800

29. a. October collections:

From A/R balance $11,000
From October billings ($100,000  0.15) 15,000
Total October collections $26,000
November collections:
From October billings ($100,000  0.55) $55,000
From November billings ($65,000  0.15) 9,750
Total November collections $64,750
December collections:
From October billings ($100,000  0.30) $30,000
From November billings ($65,000  0.55) 35,750
From December billings ($15,000  0.15) 2,250
Total December collections $68,000
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232 Chapter 8

b. October collections $ 26,000

Less October business costs (22,500)
Remainder 10/31 $ 3,500
November collections 64,750
Total $ 68,250
Less November business costs (22,500)
Remainder 11/30 $ 45,750
Yes, Irby could pay the $45,000 for the trip at the end of November.
c. If Irby pays for the trip and if everything works out exactly as planned, she
would have $750 of cash on hand in the business. This is an exceptionally
small “cushion” and she should probably not make such a large cash
expenditure at the end of November.
Remainder 11/30 $ 45,750
December collections 68,000
Total $113,750
Less December business costs (22,500)
Remainder 12/31 $ 91,250
However, if Irby has good credit, she could borrow the $45,000 to pay for
the trip at the end of November and pay the money back at the end of
December when she has a substantial cash balance. If she can borrow at 12%,
she would incur 1% per month for interest—or $450 ($45,000  0.01) until
the end of December. By paying for the trip in November, she’d be saving
$5,000 and spending $450—saving a total of $4,550.

30. a. Balance at May 31 $119,600

Remainder of May credit sales (90,000)
Remainder of April credit sales $ 29,600
% of April credit sales uncollected at end of May ÷ 0.10
April sales on credit $296,000
% of total sales made on credit ÷ 0.80
Total April sales $370,000

b. Remainder of May credit sales $ 90,000

% of May credit sales uncollected at end of May ÷ 0.30
May credit sales $300,000
c. June collections of April credit sales (remainder) $ 29,600
June collections of May credit sales ($300,000  20%) 60,000
June cash sales ($450,000  20%) 90,000
June collections of June credit sales ($450,000  80% =
$360,000 credit sales; $360,000  70%) 252,000
Total June collections $431,600

d. Balance from May sales ($300,000  10%) $ 30,000

Balance from June sales ($360,000  30%) 108,000
Total June 30 A/R balance $138,000

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Chapter 8 233

31. a. Balance at October 1 $ 632,500

Remainder of September billings (480,000)
Remainder of August billings $ 152,500
% of August billings uncollected at end of September ÷ 0.25
August billings $ 610,000
b. Remainder of September billings $ 480,000
% uncollected at end of September ÷ 0.80
September billings $ 600,000
% estimated uncollectible  0.03
Total September billings expected to be uncollectible $ 18,000
c. Oct. collections of Aug. billings ($610,000  22%) $ 134,200
Oct. collections of Sept. billings ($600,000  55%) 330,000
Oct. collections of Oct. billings ($750,000  20%) 150,000
Total October collections $ 614,200

32. a. January February March Total

Units produced 20,000 50,000 70,000 140,000
Pounds per unit 2 2 2 2
Pounds needed 40,000 100,000 140,000 280,000
EI in pounds 25,000 35,000 35,000 35,000
Total required 65,000 135,000 175,000 315,000
BI (0) (25,000) (35,000) (0)
Pounds to purchase 65,000 110,000 140,000 315,000
Cost per pound  $7  $7  $7  $7
Total cost of RM $455,000 $770,000 $980,000 $2,205,000
b. January February March Total
Jan. (40% less disc.; 60%) $163,800 $273,000 $ 436,800
Feb. purchases 277,200 $462,000 739,200
Mar. purchases 352,800 352,800
Total payments $163,800 $550,200 $814,800 $1,528,800
c. If Campbell Manufacturing uses a perpetual inventory system, purchase
discounts will not appear on the budgeted financial statements. The discount
amounts will simply reduce the cost of Raw Material Inventory. If the
company uses a periodic inventory system, the discounts will be recorded as
a contra-account to Purchases and will be closed (along with the other
purchases accounts) at the end of the period in determination of Cost of
Goods Manufactured.

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234 Chapter 8

33. Beginning cash balance $ 23,000

Income after taxes $336,000
Depreciation (no cash involved) 56,200
Accrued income tax expense (no cash involved) 82,000
Increase in A/R (sold more than collected) (8,000)
Decrease in A/P (paid for more than purchased) (7,000)
Estimated bad debts (no cash involved) 4,100
Dividends declared (no effect on income or cash) 0
Dividends paid (47,000)
Projected increase in cash 416,300
Ending cash balance $439,300

34. a. CGS ($2,700,000  0.60) $1,620,000

Less decrease in inventory (sold more than bought) (43,750)
Plus decrease in A/P (paid for more than bought) 35,000
Cash payments for inventory $1,611,250
b. Cash payments for inventory $1,611,250
Wages expense 325,500
Less increase in W/P (expensed more than paid) (42,000)
Other cash expenses 245,000
Total cash disbursements $2,139,750

35. July August Sept. Total

Beginning cash balance $ 7,400 $ 7,200 $ 7,200 $ 7,400
Cash receipts 16,400 20,200 33,800 70,400
Total cash available $23,800 $27,400 $41,000 $ 77,800
Cash disbursements:
Payments on account $ 2,600 $ 7,800 $11,400 $ 21,800
Wage expenses 10,000 12,200 12,400 34,600
Overhead costs 8,000 9,200 8,800 26,000
Total disbursements $20,600 $29,200 $32,600 $ 82,400
Cash excess (inadequacy) $ 3,200 $ (1,800) $ 8,400 $ (4,600)
Minimum cash balance (7,000) (7,000) (7,000) (7,000)
Cash available (needed) $ (3,800) $ (8,800) $ 1,400 $(11,600)
Financing:
Borrowings (repayments) $ 4,000 $ 9,000 $ (1,000) $ 12,000
Sell (acquire) investments 0 0 0 0
Receive (pay) interest 0 0 (20) (20)
Ending cash balance $ 7,200 $ 7,200 $ 7,380 $ 7,380

36. a. CGS = $2,000,000 + (0.65  $8,000,000) = $7,200,000

b. CGS ($800,000  0.75) $600,000
Increase in Inventory 20,000
Decrease in Accounts Payable 45,000
Total cash payment for inventories $665,000

c. y = $250,000 + $17.50X

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