Arrowdale Manufacturing Budget Information

Arrowdale Manufacturing Budget Information

Arrowdale Manufacturing is a family-owned business with over 50 years of operation, primarily producing high-quality stainless steel thermos bottles known for their durability among construction workers and other demanding users. The company plans to expand its manufacturing capacity by opening a second shift and hiring additional staff. To facilitate a strategic decision, the company's management has requested the preparation of several budgets and financial forecasts for the upcoming year, including an annual sales budget, production budget, direct materials budget, direct labor budget, and a budgeted income statement. This comprehensive financial planning aims to provide clarity on anticipated sales, production needs, direct costs, and profitability, thereby supporting informed decision-making by the board of directors.

The sales budget is based on an anticipated volume of 600,000 units at a selling price of $22.50 per unit. This projection serves as the foundation for further budgeting, as it influences production planning, raw material procurement, labor requirements, and overall financial performance. The desired ending inventory for finished goods is 40,000 units, with a beginning inventory of 35,000 units, ensuring that supply meets expected sales demands while maintaining inventory levels that support smooth operations.

The production budget is designed to meet the sales forecast while considering the beginning and ending inventories. It will calculate the number of units to produce by adjusting the expected sales volume for changes in inventory levels. The goal is to produce enough units to satisfy customer demand and maintain the desired ending inventory, factoring in the beginning inventory from the prior period.

The direct materials budget addresses the raw material requirements for the production process. Each unit requires 2.5 pounds of direct materials at a cost of $3.50 per pound. The budget considers the current inventory of 50,000 pounds and the desired ending inventory of 45,000 pounds to determine the quantity of materials to purchase. This ensures sufficient raw materials are available for production while avoiding excess inventory, which ties up valuable capital and storage costs.

The direct labor budget outlines the labor hours required to produce the forecasted units, assuming 0.5 hours per unit at a wage rate of $12.00 per hour. This budget ensures that labor resources are appropriately allocated and that labor costs are accurately estimated, considering the need for additional shifts and personnel due to expansion plans.

The budgeted income statement integrates these components by calculating the total cost of goods manufactured (COGM), which is projected to be $18.00 per unit. Selling expenses are estimated at $660,000, while administrative expenses are set at $540,000. An interest expense of $5,000 is included, and the applicable income tax rate is 30%. The statement will project the company's profitability after accounting for these expenses, providing a comprehensive view of expected financial performance for the next year.

Finally, comparing the current year's finished goods inventory of 25,000 units with the budgeted ending inventory of 20,000 units will help assess inventory turnover and working capital requirements. These projections collectively enable the management team and board members to evaluate the financial viability of expanding production while maintaining the company's reputation for quality and durability.

Paper For Above instruction

Introduction

Arrowdale Manufacturing’s decision to expand production through a second shift necessitates a detailed financial plan that aligns with its strategic goals. The preparation of comprehensive budgets—including sales, production, direct materials, direct labor, and income statement projections—is crucial for accurately forecasting the company's financial health, resource requirements, and profitability. This paper discusses each of these budgets in detail, integrating them into a cohesive financial forecast that supports the company's growth ambitions.

Sales Budget

The sales budget functions as the foundation of the company's operational planning. With an anticipated sales volume of 600,000 units at a unit price of $22.50, the total sales revenue is expected to be $13,500,000 (600,000 units × $22.50). Recognizing that sales often fluctuate, the company has set a desired ending inventory of 40,000 units to buffer against unforeseen demand or production delays, with a beginning inventory of 35,000 units from the prior period. This buffer ensures continuity in supply and customer satisfaction. The sales budget informs subsequent production and procurement planning, making it a critical first step in the budgeting process.

Production Budget

The production budget calculates the number of units that must be manufactured to meet projected sales and inventory requirements. It adjusts the anticipated sales volume for changes in inventory levels using the formula:

Production Units = Expected Sales + Desired Ending Inventory - Beginning Inventory.

Substituting the figures: 600,000 + 40,000 - 35,000 = 605,000 units. Therefore, Arrowdale Manufacturing plans to produce 605,000 units in the upcoming year to satisfy sales demands while maintaining desired stock levels. This figure guides manufacturing schedules and capacity planning, especially as the company considers expanding shifts to accommodate increased output.

Direct Materials Budget

The direct materials budget is essential for ensuring the availability of raw materials necessary for production. Each thermos bottle requires 2.5 pounds of stainless steel, costing $3.50 per pound. To determine total raw material needs, the company calculates:

Total materials needed = Production units × Material per unit.

This results in 605,000 × 2.5 = 1,512,500 pounds. Considering the beginning inventory of 50,000 pounds and the desired ending inventory of 45,000 pounds, the company adjusts the procurement to:

Materials to purchase = Total materials needed + Desired ending inventory - Beginning inventory.

Calculating: 1,512,500 + 45,000 - 50,000 = 1,507,500 pounds to purchase. Costing this at $3.50 per pound results in total raw material costs of $5,271,250 (1,507,500 pounds × $3.50). This precise sourcing plan balances raw material availability with inventory costs and storage considerations.

Direct Labor Budget

The direct labor budget estimates labor requirements based on production needs. With a labor time of 0.5 hours per unit and a wage rate of $12.00 per hour, the total labor hours needed are:

Labor hours = Production units × Labor hours per unit = 605,000 × 0.5 = 302,500 hours.

Correspondingly, total labor costs are:

Labor costs = Total hours × Wage rate = 302,500 × $12.00 = $3,630,000.

This budget informs staffing needs, scheduling, and wages, particularly as the company plans to add a second shift and hire new employees to meet increased production requirements.

Budgeted Income Statement

The income statement consolidates all costs and revenues to project profitability. With a cost of goods sold (COGS) per unit of $18.00, total COGS for 605,000 units will be $10,890,000. Total sales revenue remains at $13,500,000. Deducting COGS yields a gross profit of $2,610,000. Selling expenses are estimated at $660,000, while administrative expenses amount to $540,000, totaling $1,200,000 of operating expenses. Interest expense of $5,000 is factored into financial costs, leaving earnings before tax as:

Gross profit - Operating expenses - Interest expense = $2,610,000 - $1,200,000 - $5,000 = $1,405,000.

Applying the 30% income tax rate, the net income is:

Net income = Earnings before tax × (1 - Tax rate) = $1,405,000 × 0.70 = $983,500.

This forecast provides a comprehensive view of anticipated profitability, guiding strategic decisions and performance evaluations.

Current and Future Inventory Analysis

Comparing current year finished goods inventory of 25,000 units with the projected ending inventory of 20,000 units indicates a slight reduction in inventory holdings, suggesting a strategy to optimize working capital and reduce storage costs. Maintaining appropriate inventory levels helps ensure smooth production flow, meet customer demand, and avoid excess stock that could tie up capital. Proper inventory management is critical amidst expansion plans, ensuring sufficient supplies without overstocking.

Conclusion

In conclusion, the detailed budgets for sales, production, direct materials, direct labor, and income projection form an integrated financial framework that supports Arrowdale Manufacturing’s strategic expansion. Precise forecasting allows management to allocate resources efficiently, control costs, and maximize profitability. As the company considers adding a second shift and new hires, these budgets serve as vital tools for assessing the financial impact, ensuring sustainable growth, and maintaining the high-quality standards that have defined Arrowdale Manufacturing for over half a century. Effective implementation of these budgets will enable the company to capitalize on market opportunities while managing operational risks in a competitive environment.

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