Reference no: EM132190671
Assignment: Cutting Edge Technology
Master Budget Case Study
Cutting Edge Technology is a high-technology organization that produces a mass storage system. The design of Cutting Edge's system is unique and represents a breakthrough in the industry. The units Cutting Edge produces combine positive features of both floppy and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2016). 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.
1. Fourth quarter sales for 2015 are 55,000 units
2. Unit sales by quarter for 2016 are projected as follows:
First quarter 65,000
Second quarter 70,000
Third quarter 75,000
Fourth quarter 90,000
The selling price is $400 per unit. All sales are credit sales. Cutting Edge collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent are collected in the following quarter. There are no bad debts.
3. There is no beginning inventory of finished goods. Cutting Edge is planning the following ending finished goods inventories (in units) for each quarter:
First quarter 13,000
Second quarter 15,000
Third quarter 20,000
Fourth quarter 10,000
4. Each mass storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.
5. There are 65,700 units of direct materials in beginning inventory as of January 1, 2016. at the end of each quarter, Cutting Edge plans to have 30 percent of the direct materials needed for next quarter's unit sales. Cutting Edge will end the year with the same level of direct materials found in this year's beginning inventory.
6. Cutting Edge buys direct materials on account. Half of the purchases are paid for in the quarter. Wages and salaries are paid on the 15th and 30th of each month.
7. 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 expected actual units produced.
8. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
9. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.
10. Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
11. The balance sheet as of December 31, 2015 is as follows:
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Assets
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Cash
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$250,000
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Direct Materials Inventory
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5,256,000
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Accounts Receivable
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3,300,000
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Plant and Equipment
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33,500,000
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Total Assets
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42,306,000
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Liabilities and Stockholder's Equity
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Accounts Payable*
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$7,248,000
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Capital Stock
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27,000,000
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Retained Earnings
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8,058,000
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Total Liabilities and Stockholder's Equity
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$42,306,000
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*For purchase of direct materials only
12. Cutting Edge will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2,000,000 of equipment will be purchased.
13. Management has set a policy requiring a minimum cash balance of $5,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of the quarter and all repayments are made at the end of the quarter. Borrowings and repayments must be in multiples of $1,000. Interest is due and paid at the end of each quarter. Cutting Edge makes principle payments when the cash balance exceeds the minimum by at least $1,000. The annual interest rate is 12%.