Lucky Charms

Topics: Balance sheet, Liability, Asset Pages: 5 (843 words) Published: November 18, 2010

Lucky Charms, Inc. (“LC”) manufactures a line of hand-crafted decorative silver amulets featuring a variety of designs. The amulets are mainly sold to retailers who then sell the amulets to consumers in their shops or at outdoor, street and weekend markets. LC’s business is somewhat seasonal in that most sales occur in the spring (in anticipation of the summer outdoor market season) with significantly fewer sales in the fall and winter. For the past couple of years LC has experienced cash flow problems that have resulted in LC having to limit production in several months which has hurt sales and profitability. You have been hired by LC as a consultant with the task of developing a master budget. LC plans to use this master budget to approach its bank for a line of credit that will help LC better manage its historic cash flow problem.

The owner of LC has provided you with the following data regarding LC’s business and operations.

• One amulet equals one unit of production.

• The selling price of the amulets is $40.

• Although the amulets have many different designs, they all contain about the same amount (0.1 ounces) of silver.

• The cost of silver (the only direct material) is $25 per ounce.

• The amulets each require 1.5 hours of skilled craftsman (direct) labor to produce. Assume that direct labor is a completely variable cost.

• LC pays its skilled craftsmen $16 per hour.

• Since the amulets are fairly easy to produce, LC only maintains a finished goods inventory equal to only 10% of the next months projected sales.

• However, in order to not be caught without the ability to produce, LC maintains a raw materials (silver) inventory equal to 70% of the next months production needs.

• LC sells to its customers on 60 day terms; meaning that sales in January will be collected in March.

• LC has 30 day payment terms with its raw materials supplier and for all of its manufacturing overhead (“MO”) and selling, general & administrative expenses (“SG&A”); meaning that purchases in January will be paid for in February, etc.

• Direct labor is paid for in the month in which it is incurred.

• LC’s variable SG&A is $2.25 per unit which consists of $.25 of shipping expense and $2 of selling commissions.

• LC rents a small shop for $1,000 per month; 50% of the shop is used as an office and 50% is used as a production area.

• Monthly operating expenses are as follows:

Rent expense (50% of $1,000 total) $500

Salaries 3,000

Utilities 100

Insurance 150

Depreciation 50

Miscellaneous 100

Total $3,900

• LC’s variable manufacturing overhead activity base is direct labor hours. LC’s fixed manufacturing overhead consists of the following:

Metalworking tools $30,000

Solvents 10,000

Miscellaneous 5,000

Total $45,000

• LC’s fixed manufacturing overhead consists of the following:

Rent expense (50% of $1,000 total) $500

Utilities 100

Insurance 100

Depreciation 100

Miscellaneous 50

Total $850

• LC’s 2011 Sales Projection (in units), including November and December 2010, is as follows:

January 800 June 2,100 November 900

February 800 July 1,800 December 700

March 1,000 August 1,000 January 2012 800

April 1,600 September 900 January 2012 800

May 2,500 October 900

• LC plans to buy new equipment in June 2011 for $10,000 and December 2011 for $5,000.

• LC pays a cash dividend of $4,000 at the end of each calendar quarter.

• LC’s December 31, 2010 Balance Sheet is expected to be as follows:

Assets Liabilities & Equity

Cash $15,000 Accounts payable $9,600

Accounts receivable 44,000 Total liabilities 9.600

Inventory: Common stock, no par 30,000

Finished goods 2,200 Retained earnings 42,900

Raw materials 1,300 Total equity 72,900

Equipment Total liabilities & equity $82,500

Original cost 34,000

Accumulated Depr. (14,000)

Total assets...
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