Master Budget Cash Proforma

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					Strategy and the
Master Budget
The Budget is--



      a profit or operating plan
      a basis for resource allocation
      a communication and authorization device
      a motivating device
      a guideline for operations and gauge for
       controlling operations
      a basis for performance evaluation
Formulation of Strategy

   Analyze external
       factors                                     Assess internal
   Competition                                        factors
   Economic                                        Financial
   Political                                       Managerial
   Technological                                   Functional
   Regulatory                                      Cultural
   Social               Match opportunities
   Environmental        with strengths and
                           competitive
         Identify        advantages of the            Recognize
      opportunities,           firm.                 strengths,
    limitations, and                               weakness, and
        threats         Finalize strategic goals    competitive
                       in investments, markets,     advantages
                            and operations.
The Master Budget
                            Strategic Goals, Long-
                            Term Objectives, and
                              Long-Range Plans

   Short-Term Objectives                                  Capital Budget

                                Sales Budget
                                                        Selling and
          Production
                                                      Administrative
            Budget
                                                      Expense Budget

      Direct               Direct           Factory
     Materials             Labor           Overhead
      Budget               Budget           Budget

       Cash Budget, Pro Forma Financial Statements, Income
         Statement, Balance Sheet, Cash Flows Statement
Relationships

           Strategic Goals

        Long-Term Objectives


          Long-Range Plan
                               Capital Budgeting
        Short-Run Objectives
    F
    e
    e
    d      Master Budgets
    b
    a                              Controls
    c
    k        Operations
Internal Factors to be Considered


     Changes   in availability of equipment or
      facilities
     Adoption of new manufacturing processes
     Changes in product design or product mix
     Introduction of new products
     Changes in expectations or operating
      process of other related budget units
     Changes in expectations or operating
      processes in other related budget units
External Factors to be Considered




     Changes   in the labor market, raw material
      prices
     Availability of raw materials or
      components and their prices
     Industry’s outlook for the near term
     Competitors’ actions
Sales Forecasting Considerations


     Current sales levels and trends of sales in
      the past few years
     General economic and industry
      conditions
     Competitors’ actions and operating plans
     Pricing policies
     Advertising and promotional activities
     Unfilled back-orders
Sales Budget
                           Strategic Goals, Long-
                           Term Objectives, and
                             Long-Range Plans

   Short-Term Objectives                            Capital Budget

                               Sales Budget
Sales Budget

              Kerry Industrial Products Company
                          Sales Budget
           For the First Quarter Ended June 30, 19X8

                   April      May        June      Quarter
Sales in units     20,000     25,000     35,000        80,000
Selling price
 per unit          x $30      x $30      x $30      x $30
  Total sales    $600,000   $750,000 $1,050,000 $2,400,000
Production Budget
                           Strategic Goals, Long-
                           Term Objectives, and
                             Long-Range Plans

   Short-Term Objectives                            Capital Budget

                               Sales Budget

          Production
            Budget
Production Budget


     Kerry expects to have 5,000 units on hand
     on April 1 and desires to have 30 percent of
      the following month’s predicted sales on
           hand at the end of the period.

  Determining the budgeted units of production:
  Budgeted = Budgeted + Desired - Beginning
  Production Sales      Ending     Inventory
  (in units) (in units) Inventory  (in units)
                        (in units)
Production Budget


     Kerry expects to have 5,000 units on hand
     on April 1 and desires to have 30 percent of
      the following month’s predicted sales on
           hand at the end of the period.

  Determining the budgeted units of production:
  Budgeted = 20,000       + Desired - Beginning
  Production                Ending     Inventory
  (in units) From the       Inventory  (in units)
             Sales Budget   (in units)
Production Budget


  Step 1: Determine the desired ending
           level (April 30):
           30% x 25,000 units = 7,500 units

  Determining the budgeted units of production:
  Budgeted = 20,000      +   7,500   - Beginning
  Production                           Inventory
  (in units)                           (in units)
Production Budget


  Step 2: Calculate the budgeted production
          units in April.



  Determining the budgeted units of production:
  Budgeted = 20,000      +   7,500   - 5,000
  Production
  (in units)
Production Budget


  Step 2: Calculate the budgeted production
          units in April.



  Determining the budgeted units of production:
  22,500    = 20,000     +   7,500   - 5,000
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000       80,000
Add: Desired
 ending inven-
 tory of fin. units 7,500
Units needed       27,500
Less: Beg. inven-
 tory of finished
 units              5,000
Budgeted pro-
  duction          22,500
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000       80,000
Add: Desired
 ending inven-
 tory of fin. units 7,500     10,500
Units needed       27,500     35,500
Less: Beg. inven-
 tory of finished
 units              5,000      7,500
Budgeted pro-
  duction          22,500     28,000
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000       80,000
Add: Desired
 ending inven-                             30% of next
 tory of fin. units 7,500     10,500       month’s sales
Units needed       27,500     35,500
Less: Beg. inven-
 tory of finished
 units              5,000      7,500
Budgeted pro-
  duction          22,500     28,000
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000
Add: Desired
 ending inven-
 tory of fin. units 7,500     10,500      12,000
Units needed       27,500     35,500      47,000
Less: Beg. inven-
 tory of finished
 units              5,000      7,500      10,500
Budgeted pro-
  duction          22,500     28,000      35,500
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000       80,000
Add: Desired
 ending inven-
 tory of fin. units 7,500     10,500      12,000       12,000
Units needed       27,500     35,500      47,000       92,000
Less: Beg. inven-
 tory of finished
 units              5,000      7,500      10,500        5,000
Budgeted pro-
  duction          22,500     28,000      35,500       87,000
Production Budget
              Kerry Industrial Products Company
           For the First Quarter Ended June 30, 19X8
                  April       May         June     Quarter
Sales in units     20,000     25,000      35,000       80,000
Add: Desired
 ending inven-
 tory of fin. units 7,500     10,500      12,000       12,000
Units needed       27,500     35,500      47,000       92,000
Less: Beg. inven-
 tory of finished                30% of next
 units              5,000       month’s sales
                               7,500    10,500          5,000
Budgeted pro-
  duction          22,500     28,000      35,500       87,000
Direct Materials Purchase Budget
                           Strategic Goals, Long-
                           Term Objectives, and
                             Long-Range Plans

   Short-Term Objectives                            Capital Budget

                               Sales Budget

          Production
            Budget

      Direct
     Materials
      Budget
Direct Materials Purchase Budget


  Kerry Industrial Products Company expects to manufacture
   36,000 units in July. The desired ending inventory is 10,800
 pounds based on each unit requiring 3 pounds of alloy per unit.
  Determining the direct materials purchases (in
  units):
  Total    +      Desired =     Total    -     Direct
  direct          direct        direct         materials
  materials       materials     materials      beginning
  needed in       ending        needed for     inventory
  production      inventory     the period
Direct Materials Purchase Budget


     On April 1, 7,000 pounds of alloy are on hand.


  Determining the direct materials purchases (in
  units):
  Total    +   Desired =   Total    -   7,000
  direct       direct      direct       begin
  materials    materials   materials
  needed in    ending      needed for
  production   inventory   the period
Direct Materials Purchase Budget


   Budgeted production is 22,500, so 67,500 pounds of
        alloy are needed for April’s production.

  Determining the direct materials purchases (in
  units):
   67,500 +    Desired =   Total    -   7,000
  production   direct      direct       begin
               materials   materials
               ending      needed for
               inventory   the period
Direct Materials Purchase Budget


   The desired ending inventory on April 30, 19X8 is
            8,400 pounds of aluminum alloy.

  Determining the direct materials purchases (in
  units):
   67,500 +    8,400    = Total    -    7,000
  Production    end       direct        begin
                          materials
                          needed for
                          the period
Direct Materials Purchase Budget


         A total of 75,900 pounds are needed to
             meet production requirements.

  Determining the direct materials purchases (in
  units):
   67,500 +    8,400    =   75,900 -    7,000
  Production   end          needed      begin
Direct Materials Purchase Budget


   The firm should purchase 68,900 pounds of alloy to
              meet the firm’s April needs.

  Determining the direct materials purchases (in
  units):
   67,500 +     8,400   =   75,900 -    7,000
                            need        already have
                        = 68,900 must purchase
Direct Materials Purchase Budget


  The last step is to multiply the purchase requirement
          by the unit price of $2.45 per pound.

  Determining the direct materials purchases (in
  dollars):
   67,500 +      8,400     =   75,900 -     7,000

                           68,900 x $2.45
     April’s budgeted
      direct materials     = $168,805
    purchases in dollars
Direct Labor Budget
                            Strategic Goals, Long-
                            Term Objectives, and
                              Long-Range Plans

   Short-Term Objectives                             Capital Budget

                                Sales Budget

          Production
            Budget

      Direct               Direct
     Materials             Labor
      Budget               Budget
Direct Labor Budget


              Kerry Industrial Products Company
           Direct Labor Budget: Semi-Skilled Labor
           For the First Quarter Ended June 30, 19X8

                                       April     May      June
Budgeted production                      22,500 28,000 36,500
Direct labor hours per unit            x     .5 x     .5 x     .5
Total direct labor hours needed          11,250 14,000 18,250
Hourly wage rate for semi-skilled labor $8.00     $8.00    $8.00
Total wages for semi-skilled labor     $90,000 $112,000 $146,000
Direct Labor Budget


              Kerry Industrial Products Company
              Direct Labor Budget: Skilled Labor
           For the First Quarter Ended June 30, 19X8

                                       April     May     June
Budgeted production                      22,500 28,000 36,500
Direct labor hours per unit              x     .2 x. .2 x    .2
Total skilled direct labor hours needed    4,500   5,600  7,300
Hourly wage rate for skilled labor       $12.00 $12.00 $12.00
Total wages for skilled labor           $54,000 $67,200 $87,600
Cost of Goods Manufactured and Sold Budget


                                             April    from the
  Direct materials                         $165,025   direct
  Direct labor                              144,000   materials
  Manufacturing overhead                    113,600   usage
  Total cost of goods manufactured         $422,625   budget
  Finished goods beginning inventory         90,000
  Total cost of goods available for sale   $512,625
  Finished goods ending inventory           140,875
  Cost of goods sold                       $371,750
  Manufacturing cost per unit              $18.7833
Cost of Goods Manufactured and Sold Budget

                                                      from the
                                             April    direct
  Direct materials                         $165,025   labor
  Direct labor                              144,000   budget
  Manufacturing overhead                    113,600   from the
  Total cost of goods manufactured         $422,625   manu-
  Finished goods beginning inventory         90,000   facturing
  Total cost of goods available for sale   $512,625   overhead
  Finished goods ending inventory           140,875   budget
  Cost of goods sold                       $371,750
  Manufacturing cost per unit              $18.7833
Cost of Goods Manufactured and Sold Budget


                                             April
  Direct materials                         $165,025
  Direct labor                              144,000
  Manufacturing overhead                    113,600   from the
  Total cost of goods manufactured         $422,625   March 31
  Finished goods beginning inventory         90,000   budgeted
  Total cost of goods available for sale   $512,625   balance
  Finished goods ending inventory           140,875   sheet
  Cost of goods sold                       $371,750
  Manufacturing cost per unit              $18.7833
Cost of Goods Manufactured and Sold Budget


                                             April
  Direct materials                         $165,025
  Direct labor                              144,000   based on a
  Manufacturing overhead                    113,600   desired
  Total cost of goods manufactured         $422,625   ending
                                                      finished
  Finished goods beginning inventory         90,000
                                                      goods
  Total cost of goods available for sale   $512,625   inventory
  Finished goods ending inventory           140,875   of 7,500
  Cost of goods sold                       $371,750   units (from
  Manufacturing cost per unit              $18.7833   the
                                                      production
                                                      report)
Cash Budget
                            Strategic Goals, Long-
                            Term Objectives, and
                              Long-Range Plans

   Short-Term Objectives                                  Capital Budget

                                Sales Budget
                                                        Selling and
          Production
                                                      Administrative
            Budget
                                                      Expense Budget

      Direct               Direct           Factory
     Materials             Labor           Overhead
      Budget               Budget           Budget

       Cash Budget, ProForma Financial Statements, Income
         Statement, Balance Sheet, Cash Flows Statement
Cash Budget


                                            April
  Cash Available:           Management
  Cash balance, beginning    expects to    $ 75,000
                            have $75,000
                              on hand
Cash Budget


                                                   April
  Cash Available:
  Cash balance, beginning                         $ 75,000
  Cash collections:
    Cash from cash sales                           252,000

          Budgeted sales in April (Exhibit 9-4)
          of $600,000 x 70% = $420,000 that
            are expected to be cash sales. Of
           cash sales, 40% are expected to be
              credit card sales. Therefore,
            $420,000 x 60% is expected cash
                     from cash sales.
Cash Budget


                                               April
  Cash Available:
  Cash balance, beginning                     $ 75,000
  Cash collections:
    Cash from cash sales                       252,000
    Credit sales                               162,960
           Of the $420,000 from cash sales,
          40% of the customers are expected
            to use credit cards. The bank
                   charges a 3% fee.
            $420,000 x .40 x. 97 = $162,960
Cash Budget


                                               April
  Cash Available:
  Cash balance, beginning                     $ 75,000
  Cash collections:
    Cash from cash sales                       252,000
    Credit sales                               162,960
    Collections of accounts:
        Within the discount period              63,504

                       Go to the next slide
Collections Within the Discount Period


  Total March sales                        $450,000
  less: 70% cash sales                      315,000
  Net                                       135,000
  less: 20% not paid within the month        27,000
  Net                                       108,000
  less: 40% not paid within the discount
        period                               43,200
  Net                                        64,800
  less: 2% discount taken                     1,296
  Cash received in April for March sales    $63,504
Cash Budget


                                               April
  Cash Available:
  Cash balance, beginning                     $ 75,000
  Cash collections:
    Cash from cash sales                       252,000
    Credit sales                               162,960
    Collections of accounts:
        Within the discount period              63,504
        After the cash discount:
            From prior month’s sales            43,200

                       Go to the next slide
Collections After the Discount Period


   Total March sales                         $450,000
   Less: 70% cash sales                       315,000
   Net                                        135,000
   Less: 20% not paid within the month         27,000
   Net                                        108,000
   Less: 60% received within the discount
         period                                64,800
   Collection in April from sales in March   $ 43,200
Cash Budget


                                               April
  Cash Available:
  Cash balance, beginning                     $ 75,000
  Cash collections:
    Cash from cash sales                       252,000
    Credit sales                               162,960
    Collections of accounts:
        Within the discount period              63,504
        After the cash discount:
            From prior month’s sales            43,200
        From sales two months’ earlier          18,000
       February sales ($400,000 x .3 x .15)
Cash Budget


                                           April
  Cash Available:
  Cash balance, beginning                 $ 75,000
  Cash collections:
     Cash from cash sales                  252,000
     Credit sales                          162,960
     Collections of accounts:
         Within the discount period         63,504
         After the cash discount:
             From prior month’s sales       43,200
         From sales two months’ earlier     18,000
     Total cash collections                539,664
  Total cash available                    $614,664
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:               April
    Current month purchases                  $101,283


                            $168,805 x 60%
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:                 April
    Current month purchases                    $101,283
    Last month’s purchases                       62,000


                              $155,000 x 40%
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:                       April
    Current month purchases                          $101,283
    Last month’s purchases                             62,000
        Total payment for direct materials purchases 163,283
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:                        April
     Current month purchases                          $101,283
     Last month’s purchases                             62,000
         Total payment for direct materials purchases 163,283
  Direct labor wages (from direct labor budget)        144,000
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:                        April
     Current month purchases                          $101,283
     Last month’s purchases                             62,000
         Total payment for direct materials purchases 163,283
  Direct labor wages                                   144,000
  Manufacturing overhead (from the manufacturing
     overhead budget)                                   83,600
Cash Budget
  Cash Disbursement:
  Purchases of direct materials:                     April
    Current month purchases                        $101,283
  Manufacturing overhead (from the manufacturing
    overhead budget)                                 83,600
  Operating expenses:
    Sales commissions                                30,000
    Sales salary                                      8,000
    Administrative salaries                          25,000
    Delivery expenses                                 8,000
    Advertising                                      50,000
    Accounting and data processing                   12,000
    Other administrative expenses                     6,000
        Total payment for operating expenses        139,000
    Total cash disbursements                       $529,883
                                                                           9
Budgeted Income Statement
                            Strategic Goals, Long-
                            Term Objectives, and
                              Long-Range Plans

   Short-Term Objectives                                  Capital Budget

                                Sales Budget
                                                        Selling and
          Production
                                                      Administrative
            Budget
                                                      Expense Budget

      Direct               Direct           Factory
     Materials             Labor           Overhead
      Budget               Budget           Budget

                     Cash Budget, ProForma Financial
                  Statements, Income Statement, Balance
                       Sheet, Cash Flows Statement
Budgeted Income Statement


                    Kerry Industrial Company
                   Budgeted Income Statement
                   For the Month of April, 19X8
   Sales (Exhibit 9-4)                            $600,000
   Cost of goods sold (Exhibit 9-10)               371,750
   Gross margin                                    228,250
   Selling and administrative
     expense (Exhibit 9-1l)                        175,000
   Net operating income                             53,250
   Less:
    Income taxes (30%)                              15,975
   Net income                                     $ 37,275
Budgeted Balance Sheet
                            Strategic Goals, Long-
                            Term Objectives, and
                              Long-Range Plans

   Short-Term Objectives                                  Capital Budget

                                Sales Budget
                                                        Selling and
          Production
                                                      Administrative
            Budget
                                                      Expense Budget

      Direct               Direct           Factory
     Materials             Labor           Overhead
      Budget               Budget           Budget

                     Cash Budget, ProForma Financial
                  Statements, Income Statement, Balance
                       Sheet, Cash Flows Statement
Budgeted Balance Sheet

                      Assets
Current assets:
   Cash (Exhibit 9-12)                           $ 90,980
   Accounts receivable                            333,000
   Raw materials inventory (Exhibit 9-6)           28,080
   Finished goods inventory (Exhibit 9-10)        224,852
   Office supplies                                 38,905
        Total current assets                              $ 715,818
Plant, property, and equipment:
   Land (Exhibit 9-14)                           $ 40,000
   Building and equipment               $964,000
   Less: Accumulated depreciation        349,000 615,000
        Total plant, property, and equipment                 655,000
Total assets                                              $1,370,818
Budgeted Balance Sheet


                       Accounts Receivable
   Total sales in June              $1,050,000
   Less: 70% not sold on credit      - 735,000
   Total credit sales in June          315,000
   Less: 5% allowance for bad debts    -15,750   $299,250
   Total credit sales in May           225,000
   Less: 5% allowance for bad debts     11,250
   Sum of May and June                 213,750
   Less: Collection in June
          (80% of $225,000)          - 180,000     33,750
   Accounts receivable, June 30, 19x8            $333,000
Budgeted Balance Sheet

                 Liabilities and Stockholders’ Equity
 Current liabilities:
    Accounts payable (Exhibits 9-7 & 9-12)            $113,724
    Sales tax payable                                    7,812
    Income tax payable (Exhibit 9-13)                  102,445
          Total liabilities                                    $ 223,981
 Stockholders’ equity:
    Common stock                                       303,300
    Retained earnings (Exhibit 9-13 & 9-14)            843,537
          Total stockholders’ equity                            1,146,837
 Total liabilities and stockholders’ equity                    $1,370,818
Traditional versus Activity-Based Budgeting

                     Traditional            Activity-Based
Budgeting Expresses as the cost of   Expressed as the cost of
Unit      functional areas or        performing activities
          spending categories
Focus on Required input resources    Output or work to be done

Orienta-   History                   Continuous improvement
tion

Roles of  Does not formally          Coordinate with suppliers
Suppliers consider suppliers and     and consider the needs of
and cus- customers in budgeting      customers in budgeting
tomers
Traditional versus Activity-Based Budgeting


                   Traditional                   Activity-Based

Control   Control results to maximize     Control processes to
Objective managers’ performance           synchronize activities
                                          company wide
           Based on cost behavioral       Based on utilized and
Budget     patterns: variable and fixed   unutilized capacity
Base       costs
Decision Making
With A Strategic
Emphasis
Relevant Costs



                 Relevant costs are costs
                  to be incurred at some
                    future time and that
                   differ for each option
                      available to the
                      decision maker.
Repair or Replace?



                              Repair     Replace
      Labor (Variable)         $20,000    $19,000



                         1,000 hours x 2 years
                           x $10.00 per hour
Repair or Replace?



                              Repair     Replace
      Labor (Variable)         $20,000    $19,000



                         1,000 hours x 2 years
                           x $9.50 per hour
Repair or Replace



                                        Repair    Replace
      Labor (Variable)                  $20,000    $19,000
      Old machine repair cost (Fixed)     3,500
Repair or Replace



                                        Repair    Replace
      Labor (Variable)                  $20,000    $19,000
      Old machine repair cost (Fixed)     3,500
      Buy new machine                                7,000
Repair or Replace



                                        Repair    Replace
      Labor (Variable)                  $20,000    $19,000
      Old machine repair cost (Fixed)     3,500
      Buy new machine                                7,000
      Total costs                       $23,500    $26,000
Repair or Replace



                                        Repair    Replace
      Labor (Variable)                  $20,000    $19,000
      Old machine repair cost (Fixed)     3,500
      Buy new machine                                7,000
      Total costs                       $23,500    $26,000



                Decision: Repair the old machine
Strategic Relevant Cost Analysis


          Determining Relevant Costs Versus
           Strategic Relevant Cost Analysis
   Determine Relevant Costs   Strategic Relevant Cost Analysis

  Short-term focus            Long-term focus
  Not linked to Strategy      Linked to the firm’s strategy
  Product cost focus          Customer focus
  Precise and quantitative    Broad and subjective
  Focused on individual       Integrative; considers all
   product or decision           customer-related factors
   situation
The Decision-Making Process

  First: Determine the
  Strategic Issues
                            Third:   Analyze Relevant
  Second: Specify the                Costs
  Criteria and Identify
  the Alternative Actions         Identify and Collect
                                 Relevant Information

  Fourth: Select and            Predict Future Values of
  Implement the Best          Relevant Costs and Revenues
  Course of Action
                                      Decision Model
  Fifth: Evaluate
  Performance
The Special Order Decision




                  Annual Fund
                   Raiser Run
       TTS, Inc. normally charges $9.00 per t-shirt, but
       Alpha Beta Gamma has offered to pay $6.50 for
        1,000 t-shirts. What are the relevant costs in
         determining if the offer should be accepted?
The Special Order Decision



     Variable Costs (per unit):
     Unprinted t- shirts             $3.25
     Ink and other supplies            .95
     Machine time (operator labor)     .85
         Total Variable Costs        $5.05
The Special Order Decision



     Variable Costs (per unit):
     Unprinted t- shirts             $3.25
     Ink and other supplies            .95
     Machine time (operator labor)     .85
         Total Variable Costs        $5.05
The Special Order Decision


     Plant-level (fixed) costs:
     Setup costs                   $ 29,000
     Inspection costs                 9,000
     Material handling costs          7,000
     Depreciation and insurance     315,000
     Other fixed costs               90,000
         Total Plant Fixed Costs   $450,000
The Special Order Decision


     Plant-level (fixed) costs:
     Setup costs                   $ 29,000
     Inspection costs                 9,000
     Material handling costs          7,000
     Depreciation and insurance     315,000
     Other fixed costs               90,000
         Total Plant Fixed Costs   $450,000
The Special Order Decision



     Selling price                     $6.50
     Relevant costs             5.05
     Setup, inspection, and
      materials handling
      (batch-level costs)        .20 5.25
     Contribution per t-shirt       $1.45
The Special Order Decision


        Excess Capacity
        Selling price            $6.50
        Relevant costs            5.25
        Contribution per t-shirt $1.25

     ACCEPT THE OFFER BECAUSE THE
       SALE WILL CONTRIBUTE $1,250
     (1,000 SHIRTS X $1.25) TO INCOME!
The Special Order Decision


    Operating at Full Capacity

     Contribution margin from
      Alpha Beta Gamma order
      ($1.25 x 1,000 t-shirts)      $1,250
     Opportunity cost of lost sales
      ($9.00 - $5.25) x 1,000       (3,750)
     Contribution loss             $(2,500)
The Special Order Decision


    Operating at Full Capacity

     Contribution margin from
      Alpha Beta Gamma order
      ($1.25 x 1,000 t-shirts)      $1,250
     Opportunity cost of lost sales
      ($9.00 - $5.25) x 1,000       (3,750)
     Contribution loss             $(2,500)
Make, Lease, or Buy



       Quick Copy, Inc. is considering the purchase
    of a new copy machine at $160,000. The current
      machine is leased for $40,000 annually plus a
         per copy charge of $0.02. The new copy
       machine also carries an annual service con-
       tract charge of $20,000. Both machines are
        expected to last for two years and produce
                6,000,000 copies per year.
Make, Lease, or Buy


                                Old         New
                               Machine     Machine
   Annual lease                 $40,000        N/A
   Charge per copy              $   .02        N/A
   Purchase cost                   N/A     $160,000
   Annual service contract         N/A     $ 20,000
   Value at end of period          N/A     $ 40,000
   Expected number of copies
    per year                   6,000,000   6,000,000
Make, Lease, or Buy



    LEASE COST          =      PURCHASE COST
      Annual fee        =   Net purchase cost + service contract
    $40,000 + .02 x Q   =   ($160,000 - $40,000) + $20,000
                    Q   =   $100,000/ $.02
                        =   5,000,000 copies
Make, Lease, or Buy



    LEASE COST          =      PURCHASE COST
      Annual fee        =   Net purchase cost + service contract
    $40,000 + .02 x Q   =   ($160,000 - $40,000) + $20,000
                    Q   =   $100,000/ $.02
                        =   5,000,000 copies

        The indifference point, 5,000,000 copies, is
         lower than the expected annual machine
        usage of 6,000,000 copies. So, Quick copy
               should purchase the machine.
Sell Before or After Further Processing



                  Malfunctioning equipment
                caused 400 t-shirts not to be of
                acceptable color. They can be
               sold to an outlet store for $1,800
                   ($4.50 each) or run them
                  through the printing again.
Sell Before or After Further Processing



                                 Sell @ $4.50 each
                                  without further
                                     processing

   Manufactured
                                                Sell @ $9.00
     t-shirts
                                                  per unit

              Inspected
              and found
               defective   Re-printing at a
                t-shirts    cost of $2.30
                              each unit
Sell Before or After Further Processing



                 Relevant Costs:
                  Supplies                 $380
                  Labor                     340
                  Setup                     130
                  Inspection                 30
                  Materials handling         40
                    Total relevant costs   $920
Sell Before or After Further Processing



                 Relevant Costs:
                  Supplies                 $380
                  Labor                     340
                  Setup                     130
                  Inspection                 30
                  Materials handling         40
                    Total relevant costs   $920

                $920/400 t-shirts = $2.30 each
Sell Before or After Further Processing



                                 Sell @ $4.50 each
                                  without further
                                     processing

   Manufactured
                                                Sell @ $9.00
     t- shirts
                                                  per unit

              Inspected                          $9.00
              and found
               defective   Re-printing at a      - 2.30
                            cost of $2.30
                t-shirts
                              each unit
                                                 $6.70
Sell Before or After Further Processing



                              Sell @ $4.50 each
                               without further
                                  processing

  The net advantage to re-print is $2.20
  per t-shirt ($6.70 compared to $4.50) or
  $880 for the batch ($2.20 x 400).
                                              $9.00
                                              - 2.30
                                              $6.70
Keep or Drop Products or Services


             Issues That Should be Addressed


           Which products are most profitable?
           Are the products priced properly?
           Which products should be promoted
            and advertised most aggressively?
           Which product managers should be
            rewarded?
Keep or Drop Products or Services


                             CALM     WINDY    GALE
  Units Sold Last Year       25,000   18,750    3,750
  Price                      $30.00   $32.00   $40.00
  Relevant Costs:
     Unit Variable Cost       25.00    27.00    36.00
  Contribution Margin        $ 5.00   $ 5.00   $ 4.00
  Non-Relevant Fixed Costs     3.61     3.61     3.61
  Income Per Unit            $ 1.39   $ 1.39   $ .39
Keep or Drop Products or Services


                          CALM    WINDY      TOTAL
 Sales                   $750,000 $600,000 $1,350,000
 Variable Cost            625,000 506,250 1,131,250
 Contribution Margin      125,000   93,750    218,750
 Fixed Cost                                   171,000
 Net Income                                $ 47,750

                       Without Gale
Keep or Drop Products or Services


                       CALM WINDY         GALE     TOTAL
 Sales                 $750,000 $600,000 $150,000 $1,500,000
 Variable Cost          625,000 506,250 135,000 1,266,250
 Contribution Margin    125,000   93,750   15,000    233,750
 Fixed Cost                                          171,000
 Net Income                                       $ 62,750


                                            Same total
                          With Gale        fixed cost as
                                          “Without Gale”
Keep or Drop Products or Services


                        CALM WINDY         GALE     TOTAL
 Sales                  $750,000 $600,000 $150,000 $1,500,000
 Variable Cost           625,000 506,250 135,000 1,266,250
 Contribution Margin     125,000   93,750   15,000    233,750
 Fixed Cost                                           171,000
 Net Income                                        $ 62,750


                       $62,750 > $47,750
                        Don’t drop Gale
Keep or Drop Products or Services



         Assume that $20,375, $15,000,
           and $5,000 of advertising
            fixed cost can be directly
         traceable to Calm, Windy, and
             Gale, respectively, and
            can be canceled without
                 additional cost.
Keep or Drop Products or Services


                        CALM WINDY         GALE     TOTAL
 Sales                  $750,000 $600,000 $150,000 $1,500,000
 Variable Cost           625,000 506,250 135,000 1,266,250
 Contribution Margin     125,000   93,750   15,000    233,750
 Traceable Fixed Cost     20,375   15,000    5,000     40,375
 Contribution after
   all Relevant Cost     104,625   78,750   10,000     193,375
 Fixed Cost (Other)                                    131,125
 Net Income with Gale                                $ 62,250

                 with traceable fixed cost
One Production Constraint


                                      WINDY     GALE
   Contribution margin per unit           $5        $4
   Sewing time per jacket              3 min.    2 min.




            Constraint: Sewing machine is limited
                        to 1,200 hours per month
One Production Constraint


                                      WINDY     GALE
   Contribution margin per unit           $5        $4
   Sewing time per jacket              3 min.    2 min.
   Jackets possible per hour




            Constraint: Sewing machine is limited
                        to 1,200 hours per month
One Production Constraint


                                        WINDY      GALE
   Contribution margin per unit             $5         $4
   Sewing time per jacket                3 min.     2 min.
   Jackets possible per hour                20

                                  60 minutes/3 minutes
                                  = 20 jackets per hour


            Constraint: Sewing machine is limited
                        to 1,200 hours per month
One Production Constraint


                                      WINDY     GALE
   Contribution margin per unit           $5        $4
   Sewing time per jacket              3 min.    2 min.
   Jackets possible per hour              20        30

                                    60 minutes/2 minutes
                                    = 30 jackets per hour



            Constraint: Sewing machine is limited
                        to 1,200 hours per month
One Production Constraint


                                     WINDY     GALE
   Contribution margin per unit          $5        $4
   Sewing time per jacket             3 min.    2 min.
   Jackets possible per hour             20        30
   Contribution margin per hour




           Constraint: Sewing machine is limited
                       to 1,200 hours per month
One Production Constraint


                                     WINDY      GALE
   Contribution margin per unit          $5         $4
   Sewing time per jacket             3 min.     2 min.
   Jackets possible per hour             20         30
   Contribution margin per hour        $100

                                      20 x $5



           Constraint: Sewing machine is limited
                       to 1,200 hours per month
One Production Constraint


                                     WINDY     GALE
   Contribution margin per unit          $5        $4
   Sewing time per jacket             3 min.    2 min.
   Jackets possible per hour             20        30
   Contribution margin per hour        $100      $120

                                                   30 x $4



           Constraint: Sewing machine is limited
                       to 1,200 hours per month
One Production Constraint


                                   WINDY      GALE
   Contribution margin per unit        $5         $4
   Sewing time per jacket           3 min.     2 min.
   Jackets possible per hour           20         30
   Contribution margin per hour      $100       $120




       Windy: 1,200 hours x 20 = 24,000 jackets
       Gale: 1,200 hours x 30 = 36,000 jackets

				
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