Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x1, and the group was discussing preparation of the firm’s master budget for 20x2. “I've decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”

In response to a question about financing the acquisition, Rexford replied as follows: “The robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be purchased. We’ll finance these purchases with a one‑year $1,000,000 loan from Shark Bank and Trust Company. I’ve negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well.” With that the meeting broke up, and the budget process was on.

Photo Artistry Company is a manufacturer of metal picture frames. The firm’s two product lines are designated as S (small frames; 5 × 7 inches) and L (large frames; 8 × 10 inches). The primary raw materials are flexible metal strips and 9‑inch by 24‑inch glass sheets. Each S frame requires a 2‑foot metal strip; an L frame requires a 3‑foot metal strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Photo Artistry's controller, is in charge of preparing the master budget for 20x2. She has gathered the following information:

Sales in the 4th quarter of 20x1 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next 2 years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the 1st quarter of 20x2 are expected to be 55,000 units.

Photo Artistry's sales history indicates that 60% of all sales are on credit, with the remainder of the sales in cash. The company’s collection experience shows that 80% of the credit sales are collected during the quarter in which the sale is made, while the remaining 20% is collected in the, following quarter. For simplicity, assume the company is able to collect 100% of its accounts receivable.

The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x2.

The production manager attempts to end each quarter with enough finished‑goods inventory in each product line to cover 20% of the following quarter’s sales.

Photo Artistry makes an attempt to end each quarter with 20% of the glass sheets needed for the following quarter's production. The company wants to have an inventory of 10,400 sheets at the end of 20x2.

Metal strips are purchased locally and the company buys them on a just‑in‑time basis. Inventory of metal strips is negligible.

All direct‑material purchases are made on account, and 80% of each quarter’s purchases are paid in cash during the same quarter as the purchase. The other 20% is paid in the next quarter.

Indirect materials are purchased with cash as needed. Work‑in‑process is negligible.

Projected manufacturing costs in 20x2 are as follow:

S Frame

L Frame

Direct material:

Metal strips:

   S: 2 ft. @ $1 per foot

$2.00

   L: 3 ft. @ $1 per foot

$3.00

Glass sheets:

   S: ¼ sheet @ $8 per sheet

2.00

   L: ½ sheet @ $8 per sheet

4.00

Direct labor:

   .1 hour @ $20

2.00

2.00

Manufacturing overhead:

   .1 hour @ $10

1.00

1.00

Total manufacturing cost per unit

$7.00

$10.00



Manufacturing equipment depreciation is $20,000 per quarter.

Photo Artistry’s quarterly selling and administrative expenses are $100,000, paid in The company rents all its administrative office space and equipment. Thus, there is no depreciation related to the administrative functions of the company.

The $1,000,000 loan from Shark Bank and Trust Company will be received on January 1, 20x2. Photo Artistry will use all the money immediately to purchase new equipment. Interest payments will be made at the end of each quarter. Loan principal will be paid in four equal installments of $250,000 at the end of each quarter.

Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

Photo Artistry’s projected balance sheet as of December 31, 20x1, follows:

Cash

$      95,000

Accounts receivable

132,000

Inventory:

   Raw material

59,200

   Finished goods

167,000

   Plant and equipment, net

8,000,000

Total assets

$   8,453,200

Accounts payable



$       99,400

Common stock

5,000,000

Retained earnings

3,353,800

Total liabilities and stockholders' equity

$ 8,453,200

Transcribed Image Text:Useful Hints • Present all your assumptions (i.e., % of credit sales collected during the quarter) at the bottom of each schedule. Use absolute references so you don't have to type the same number over and over. • Each budget should include a column for each quarter and a column showing the total for the entire year. Sales budget – There should be two sections in this budget; one showing sales of S frames and another showing sales of L frames. Include a row showing total sales revenues (S frames + L frames). • Schedule of expected cash collections (sales budget) should be prepared using the following format: cash sales + cash collections from credit sales made during the current quarter + cash collections from credit sales made during the previous quarter = total cash receipts • Production budget – There should be two sections in this budget; one for the S frames and another for the L frames. • Direct materials budget – Determine the company's total metal strip needs first and then the total cost of metal strips to be purchased. Do the same with the glass sheets. Thus, there should be five sections in this budget: metal strips for S frames, metal strips for L frames, glass for S frames, glass for L frames, and the schedule of cash disbursements for materials. Don't forget to include a row showing total material purchases (metal + glass) before the schedule of cash disbursements. Schedule of schedule of cash disbursements for materials (direct materials budget) should be prepared using the following format: cash payments for purchases during the current quarter + cash payments for purchases during the previous quarter = total cash payments for raw-material purchases
Transcribed Image Text:Photo Artistry Company Sales Budget For the year ended December 31, 20x2 Quarter S Frames 4Q20X1 1Q20x2 2Q20x2 3Q20x2 4Q20x2 Year 20x2 Budgeted sales in units Selling price per unit Total S-frame sales L Frames Budgeted sales in units Selling price per unit Total L-frame sales Total sales Percentage of cash sales Percentage of non-cash sales Percentage of credit sales collected in the period of sale Percentage of creditsales collected in the period after sale Schedule of Expected Cash Collections Quarter 1Q20x2 2Q20x2 3Q20x2 4Q20x2 Year 20x2 Cash sales plus cash collections - current quarter plus cash collections - previous quarter Total cash collections

Question

Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x1, and the group was discussing preparation of the firm’s master budget for 20x2. “I've decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”

In response to a question about financing the acquisition, Rexford replied as follows: “The robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be purchased. We’ll finance these purchases with a one‑year $1,000,000 loan from Shark Bank and Trust Company. I’ve negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well.” With that the meeting broke up, and the budget process was on.

Photo Artistry Company is a manufacturer of metal picture frames. The firm’s two product lines are designated as S (small frames; 5 × 7 inches) and L (large frames; 8 × 10 inches). The primary raw materials are flexible metal strips and 9‑inch by 24‑inch glass sheets. Each S frame requires a 2‑foot metal strip; an L frame requires a 3‑foot metal strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Photo Artistry's controller, is in charge of preparing the master budget for 20x2. She has gathered the following information:

Sales in the 4th quarter of 20x1 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next 2 years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the 1st quarter of 20x2 are expected to be 55,000 units.

Photo Artistry's sales history indicates that 60% of all sales are on credit, with the remainder of the sales in cash. The company’s collection experience shows that 80% of the credit sales are collected during the quarter in which the sale is made, while the remaining 20% is collected in the, following quarter. For simplicity, assume the company is able to collect 100% of its accounts receivable.

The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x2.

The production manager attempts to end each quarter with enough finished‑goods inventory in each product line to cover 20% of the following quarter’s sales.

Photo Artistry makes an attempt to end each quarter with 20% of the glass sheets needed for the following quarter's production. The company wants to have an inventory of 10,400 sheets at the end of 20x2.

Metal strips are purchased locally and the company buys them on a just‑in‑time basis. Inventory of metal strips is negligible.

All direct‑material purchases are made on account, and 80% of each quarter’s purchases are paid in cash during the same quarter as the purchase. The other 20% is paid in the next quarter.

Indirect materials are purchased with cash as needed. Work‑in‑process is negligible.

Projected manufacturing costs in 20x2 are as follow:

	S Frame	L Frame
Direct material:
Metal strips:
S: 2 ft. @ $1 per foot	$2.00
L: 3 ft. @ $1 per foot		$3.00
Glass sheets:
S: ¼ sheet @ $8 per sheet	2.00
L: ½ sheet @ $8 per sheet		4.00
Direct labor:
.1 hour @ $20	2.00	2.00
Manufacturing overhead:
.1 hour @ $10	1.00	1.00
Total manufacturing cost per unit	$7.00	$10.00

Manufacturing equipment depreciation is $20,000 per quarter.

Photo Artistry’s quarterly selling and administrative expenses are $100,000, paid in The company rents all its administrative office space and equipment. Thus, there is no depreciation related to the administrative functions of the company.

The $1,000,000 loan from Shark Bank and Trust Company will be received on January 1, 20x2. Photo Artistry will use all the money immediately to purchase new equipment. Interest payments will be made at the end of each quarter. Loan principal will be paid in four equal installments of $250,000 at the end of each quarter.

Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

Photo Artistry’s projected balance sheet as of December 31, 20x1, follows:

Cash	$ 95,000
Accounts receivable	132,000
Inventory:
Raw material	59,200
Finished goods	167,000
Plant and equipment, net	8,000,000
Total assets	$ 8,453,200
Accounts payable	$ 99,400
Common stock	5,000,000
Retained earnings	3,353,800
Total liabilities and stockholders' equity	$ 8,453,200

Useful Hints
• Present all your assumptions (i.e., % of credit sales collected during the quarter) at the bottom
of each schedule. Use absolute references so you don't have to type the same number over and
over.
• Each budget should include a column for each quarter and a column showing the total for the
entire year.
Sales budget – There should be two sections in this budget; one showing sales of S frames and
another showing sales of L frames. Include a row showing total sales revenues (S frames + L
frames).
• Schedule of expected cash collections (sales budget) should be prepared using the following
format:
cash sales
+ cash collections from credit sales made during the current quarter
+ cash collections from credit sales made during the previous quarter
= total cash receipts
• Production budget – There should be two sections in this budget; one for the S frames and
another for the L frames.
• Direct materials budget – Determine the company's total metal strip needs first and then the total
cost of metal strips to be purchased. Do the same with the glass sheets. Thus, there should be
five sections in this budget: metal strips for S frames, metal strips for L frames, glass for S
frames, glass for L frames, and the schedule of cash disbursements for materials. Don't forget to
include a row showing total material purchases (metal + glass) before the schedule of cash
disbursements.
Schedule of schedule of cash disbursements for materials (direct materials budget) should be
prepared using the following format:
cash payments for purchases during the current quarter
+ cash payments for purchases during the previous quarter
= total cash payments for raw-material purchases

Photo Artistry Company
Sales Budget
For the year ended December 31, 20x2
Quarter
S Frames
4Q20X1
1Q20x2
2Q20x2
3Q20x2
4Q20x2
Year 20x2
Budgeted sales in units
Selling price per unit
Total S-frame sales
L Frames
Budgeted sales in units
Selling price per unit
Total L-frame sales
Total sales
Percentage of cash sales
Percentage of non-cash sales
Percentage of credit sales collected in the period of sale
Percentage of creditsales collected in the period after sale
Schedule of Expected Cash Collections
Quarter
1Q20x2
2Q20x2
3Q20x2
4Q20x2
Year 20x2
Cash sales
plus cash collections - current quarter
plus cash collections - previous quarter
Total cash collections

Accepted Answer

The process of creating and managing a financial plan that forecasts income and expenses for a time…