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Chapter 22: Q46PGB (page 1250)

Using sensitivity analysis Caputo Company prepared the following budgeted income statement for the first quarter of 2018:

Caputo Company is considering two options. Option 1 is to increase advertising by \(1,100 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.

Requirements

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)10,000. Round all calculations to the nearest dollar.

2. Which option should Caputo choose? Explain your reasoning.

Short Answer

Expert verified
  1. Budget, option 1 - $4,239 and option 2 - $4,375
  2. Holly should choose option 2.

Step by step solution

01

Preparation of budget under both options

Option 1:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (50% of sales)

5,000

6,250

7,813

19,063

Gross profit

5,000

6,250

7,812

19,062

S&A Expenses ($4,100 + 5% of sales)

4,600

4,725

4,881

14,206

Operating income

1,600

1,525

2,931

6,056

Income Tax Expense (30% of operating income)

480

458

879

1,817

Net Income

$1,120

$1,067

$2,052

$4,239

Option 2:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (55% of sales)

5,500

6,875

8,594

20,969

Gross profit

4,500

5,625

7,031

17,156

S&A Expenses ($3,000 + 5% of sales)

3,500

3,625

3,781

10,906

Operating income

1,000

2,000

3,250

6,250

Income Tax Expense (30% of operating income)

300

600

975

1,875

Net Income

$700

$1,400

$2,275

$4,375

02

Sensitivity Analysis

Holly should choose option 2 because under option 1 the company will earn $4,375.

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Most popular questions from this chapter

Using sensitivity analysis in budgeting Riverbed Sporting Goods Store has the following sales budget:

Suppose June sales are expected to be \(81,000 rather than \)65,000. Revise Riverbed’s sales budget.

Explain the difference between static and flexible budgets.

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget

Haney Company has provided the following budget information for the first quarter of 2018:

Total sales \(214,000 Budgeted purchases of direct materials 40,300 Budgeted direct labor cost 37,200 Budgeted manufacturing overhead costs:

Variable manufacturing overhead 1,150 Depreciation 1,200 Insurance and property taxes 6,600 Budgeted selling and administrative expenses: Salaries expense 13,000 Rent expense 2,500 Insurance expense 1,100 Depreciation expense 350 Supplies expense 4,280 Additional data related to the first quarter of 2018 for Haney Company:

a. Capital expenditures include \)38,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

b. Cash receipts are 65% of sales in the quarter of the sale and 35% in the quarter following the sale.

c. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter.

d. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

e. Income tax expense for the first quarter is projected at \(44,000 and is paid in the quarter incurred.

f. Haney Company expects to have adequate cash funds and does not anticipate borrowing in the first quarter.

g. The December 31, 2017, balance in Cash is \)45,000, in Accounts Receivable is \(23,200, and in Accounts Payable is \)9,000.

Requirements

1. Prepare Haney Company’s schedule of cash receipts from customers and schedule of cash payments for the first quarter of 2018.

2. Prepare Haney Company’s cash budget for the first quarter of 2018.

Preparing an operating budget—inventory, purchases, and cost of goods sold budget

Slate, Inc. sells tire rims. Its sales budget for the nine months ended September 30, 2018, follows:

Quarter Ended Nine-MonthTotal

March 31 June 30 September 30 Cash sales, 20% \( 28,000 \) 38,000 \( 33,000 \) 99,000

Credit sales, 80% 112,000 152,000 132,000 396,000 Total sales \( 140,000 \) 190,000 \( 165,000 \) 495,000

In the past, cost of goods sold has been 40% of total sales. The director of marketing and the financial vice president agree that each quarter’s ending inventory should not be below \(5,000 plus 10% of cost of goods sold for the following quarter. The marketing director expects sales of \)240,000 during the fourth quarter. The January 1 inventory was $38,000. Prepare an inventory, purchases, and cost of goods sold budget for each of the first three quarters of the year. Compute cost of goods sold for the entire nine-month period.

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget

Beasley Company’s budget committee provides the following information:

December 31, 2017, account balances:

Cash \( 32,000 Accounts Receivable 19,000 Merchandise Inventory 16,000 Accounts Payable 15,000 Salaries and Commissions Payable 2,900 Budgeted amounts for 2018:

January February Sales, all on account \) 84,000 $ 84,400 Purchases, all on account 41,000 41,600 Commissions Expense 4,200 4,220 Salaries Expense 5,000 5,000 Rent Expense 2,200 2,200 Depreciation Expense 500 500 Insurance Expense 200 200 Income Tax Expense 1,900 1,900

Requirements

1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale.

2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 70% in the month of purchase and 30% in the month following the purchase.

3. Prepare the schedule of cash payments for selling and administrative expense for January and February 2018. Assume 25% of the accrual for Salaries and Commissions Payable is for commissions and 75% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 70% in the month incurred and 30% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

4. Prepare the cash budget for January and February. Assume no financing took place.
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