Accounts 18

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Question One(25 marks)

Based on module 7 – Budgeting

Retail outlets purchase snowboards from Slopes Ltd., throughout the year. However, in anticipation of late summer and early autumn purchases, outlets ramp up inventories from January through May. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From past experience, Slopes’ accountant projects 20% of invoices are paid in the month invoiced, 50% are paid in the following month, and 30% of invoices are paid two months after the month of invoice. The average selling price per snowboard is $450.

To meet demand, Slopes increases production from December through March, because the snowboards are produced a month prior to their projected sale. Direct materials are purchased in the month of production and are paid for during the following month (terms are payment in full within 30 days of the invoice date).

Direct manufacturing labour and manufacturing overhead are paid monthly. Variable manufacturing overhead is incurred at the rate of $7 per direct manufacturing labour-hour. Variable marketing costs are driven by the number of sales visits. However, there are no sales visits during the months studied. Slopes, also incurred fixed manufacturing overhead costs of $5,500 per month and fixed non-manufacturing overhead costs of $2,500 per month.

Projected Sales:
January80 unitsApril100 units
February120 unitsMay60 units
March200 unitsJune40 units

Direct Materials and Direct Manufacturing Labour Utilisation and Cost
Unit per BoardPrice per UnitUnit
Wood5$30Board feet
Fiberglass6 5Yard
Direct manufacturing labour5 25Hour

The beginning cash balance for March, 2010, is $10,000. On June 1, 2009 Slopes had a cash crunch and borrowed $30,000 on a 6% one-year note with interest payable monthly. The note is due June 1, 2010. Using the information provided, you will need to determine whether Slopes will be in a position to pay off this short-term debt on June 1, 2010.

a.Prepare a cash budget for the months of March through May 2010. Show supporting schedules for the calculation of receivable and payables.

b.Will Slopes be in a position to pay off the $30,000 one-year note that is due on June 1, 2010? If not, what actions would you recommend to Slopes’ management?

c.Suppose Slopes is interested in maintaining a minimum cash balance of $10,000. Will the company be able to maintain such a balance during all three months analysed? If not, suggest a suitable cash management strategy.

Marking Criteria:
Application of budgeting to question 1a 18 marks
Application of budgeting to question 1b 3 marks
Application of budgeting to question 1c 4 marks

Question Two(25 marks)
Based on module 8 – CVP Analysis

Grace Inc manufactures and sells baby cots. For its 2011 budget, Grace Inc. estimated the following: Selling price $600
Net income after tax $650 000
Variable cost per cot $300
Income tax rate 30%
Annual fixed costs $150 000

Unfortunately sales were not meeting expectations. Only 525 units had been sold in the first four months of the year at the established price and cost structure. The net income projection for 2011 would not be reached unless some action is taken. A management committee presented the following mutually exclusive alternatives to the CEO.

(a) Reduce the selling price by $60. The sales organization forecasts that at this significantly reduced price, 4050 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted.

(b) Lower variable cost per unit by $15 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $45, and sales of 3300 units are expected for the remainder of the year.

(c) Reduce fixed costs by $15 000 and lower the selling price by 5%. Variable cost...
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