Construct Manny’s Budget For Raw Material Purchases In Octob

Construct Manny’s budget for raw materials purchases in October, November, and December and the total for the 4 th quarter

Develop a detailed budget for Manny’s raw materials purchases for the months of October, November, and December, along with a cumulative total for the fourth quarter. Begin by calculating the forecasted production requirements based on the sales units provided for each month. Since Manny maintains raw materials inventory equal to 10% of the following month’s production, determine the desired ending inventory for each month and the beginning inventory for each period. Using the production needs, calculate the raw materials required and adjust for the beginning and ending inventories to establish the purchase quantities for each month. Incorporate the cost per pound of titanium alloy ($8 per pound), considering materials needed per valve (3/4 pound per valve). Ensure that each month’s purchases include enough raw materials to meet production and desired ending inventory, based on the provided inventory policy. Summarize the total purchases for the entire quarter to complete the budget overview.

Paper For Above instruction

Manny’s production planning and raw materials budgeting form a critical component in managing his manufacturing operations efficiently. Given the steady sales forecast for the upcoming months, it is essential to accurately estimate raw material requirements to ensure continuous production without excess inventory accumulation. This section articulates a detailed monthly Raw Materials Purchases Budget, based on the projected sales in units, the inventory policy, and the cost per pound of titanium alloy.

Production Requirements and Inventory Policy

Manny has projected sales of 18,000 units for October, 20,000 units for November, and 21,000 units for December. Since there are no inventories of work in process or finished goods at the start, the production each month matches the sales forecast. The inventory policy requires ending raw materials inventory equal to 10% of the next month’s production needs. Consequently, beginning inventory for each month is the ending inventory of the prior month. The raw material needed for each valve is 3/4 pound, costing $8 per pound.

Calculation of Raw Materials Needed

First, determine the raw materials required for each month’s production:

• October: 18,000 valves x 3/4 pound = 13,500 pounds
• November: 20,000 valves x 3/4 pound = 15,000 pounds
• December: 21,000 valves x 3/4 pound = 15,750 pounds

Ending Inventory of Raw Materials

Ending inventory for each month is 10% of the subsequent month’s needs:

• October: 10% of November’s requirement: 10% of 15,000 = 1,500 pounds
• November: 10% of December’s requirement: 10% of 15,750 = 1,575 pounds
• December: 10% of January’s production (assuming 18,000 units): 10% of 13,500 = 1,350 pounds

Beginning Inventory of Raw Materials

Beginning inventory for October is zero (since no prior inventory). For subsequent months, beginning inventory is the previous month’s ending inventory:

• October: 0 pounds
• November: October’s ending inventory: 1,500 pounds
• December: November’s ending inventory: 1,575 pounds

Purchases Calculation

The purchase for each month equals the required raw materials for production plus ending inventory minus beginning inventory:

• October: Production requirement (13,500) + Ending inventory (1,500) - Beginning inventory (0) = 15,000 pounds
• November: Production requirement (15,000) + Ending inventory (1,575) - Beginning inventory (1,500) = 15,075 pounds
• December: Production requirement (15,750) + Ending inventory (1,350) - Beginning inventory (1,575) = 15,525 pounds

Cost of Purchases

Multiply each month’s purchase by $8 per pound:

• October: 15,000 pounds x $8 = $120,000
• November: 15,075 pounds x $8 = $120,600
• December: 15,525 pounds x $8 = $124,200

Quarterly Total

Sum of purchases over the quarter: $120,000 + $120,600 + $124,200 = $364,800

This budget ensures Manny’s raw material procurement aligns with his production targets, inventory policy, and cost structure, providing a foundation for efficient manufacturing operations and cash planning.

Construct Manny’s budgeted operating income statement for the 3 months: October, November, and December and the total for the 4th quarter

Develop a comprehensive budgeted operating income statement for Manny’s business over the three-month period of October to December. The income statement should detail revenues, cost of goods sold (COGS), gross profit, operating expenses, and operating income for each month and the total for the quarter. This process involves calculating sales revenues, COGS based on unit costs, and deducting operating expenses. Use the provided data to perform accurate and complete calculations, ensuring all components are correctly allocated and summed. The final income statement will serve as a key financial tool for managerial planning and evaluation.

Paper For Above instruction

Manny’s budgeted operating income statement for the fourth quarter provides vital insights into the anticipated profitability of his titanium valve manufacturing business. By accurately projecting revenues, direct costs, and operating expenses, we can evaluate the expected financial performance over October to December, facilitating effective management decision-making amidst market competition and cash flow considerations.

Sales Revenue Calculation

Since the sales price per valve is fixed at $21, the revenue for each month is calculated by multiplying unit sales by the price:

• October: 18,000 units x $21 = $378,000
• November: 20,000 units x $21 = $420,000
• December: 21,000 units x $21 = $441,000

Cost of Goods Sold (COGS)

COGS includes direct materials, direct labor, variable manufacturing overhead, and a proportion of fixed manufacturing overhead allocated based on production volume. The variable costs per unit are given:

• Materials: 3/4 pound x $8 = $6 per unit
• Labor: $3 per unit
• Variable overhead: $5 per unit

Total variable cost per unit = $6 + $3 + $5 = $14

Fixed manufacturing overhead is allocated based on planned production. Monthly fixed overhead costs are $75,600. For simplicity, allocate fixed overhead proportionally to the units produced each month:

• October: 18,000 units; Fixed overhead allocated = (18,000 / 59,000) x $75,600 ≈ $23,045
• November: 20,000 units; ≈ $25,629
• December: 21,000 units; ≈ $26,936

Thus, monthly COGS is:

• October: 18,000 x $14 + fixed overhead ≈ (18,000 x $14) + $23,045 = $252,000 + $23,045 = $275,045
• November: (20,000 x $14) + $25,629 = $280,000 + $25,629 = $305,629
• December: (21,000 x $14) + $26,936 = $294,000 + $26,936 = $320,936

Gross Profit and Operating Expenses

Gross profit per month is the difference between sales revenue and COGS:

• October: $378,000 - $275,045 = $102,955
• November: $420,000 - $305,629 = $114,371
• December: $441,000 - $320,936 = $120,064

Operating expenses include fixed selling and administrative costs of $41,000 per month, minus depreciation ($10,000), which is non-cash. Therefore, cash operating expenses are:

• Monthly: $41,000 - $10,000 = $31,000

Operating income is gross profit minus operating expenses:

• October: $102,955 - $31,000 = $71,955
• November: $114,371 - $31,000 = $83,371
• December: $120,064 - $31,000 = $89,064

Summarizing, the quarterly figures provide a clear picture of profitability, indicating increasing margins due to economies of scale and stable pricing strategies.

Construct Manny’s cash budget for the 3 months October, November, and December and the total for the 4th quarter

Create a detailed cash budget for Manny covering October through December, including beginning balances, cash collections from sales, cash payments for purchases, operating expenses, interest payments, and monthly borrowing and repayment activities. Incorporate the timing of cash inflows and outflows, and factor in the minimum cash balance requirement of $10,000. Calculate interest on any borrowings at 1% per month, and ensure borrowings are in $100 increments. Sum all cash flows to determine the ending cash balance for each month and develop a comprehensive overview of Manny’s liquidity position over the quarter.

Paper For Above instruction

The cash budget for Manny over the fourth quarter provides essential insights into liquidity management, highlighting the timing of cash inflows and outflows, and identifying potential borrowing needs. The budget aligns expected collections and payments with operational expenses and debt servicing, ensuring Manny maintains minimum cash balances to meet ongoing financial obligations.

Beginning Cash Balance

Manny begins October with a cash balance of $10,000, which meets the minimum requirement.

Cash Collections

Forecasted collections are based on the sales made two months earlier (20%), one month earlier (40%), and current month (40%). For October, collections include 20% of August’s sales, 40% of September’s sales, and 40% of October’s sales.

• August sales: $315,000; collections: 20% of $315,000 = $63,000
• September sales: $325,500; collections: 40% of $325,500 = $130,200
• October sales: $378,000; collections: 40% of $378,000 = $151,200

Total collections for October: $63,000 + $130,200 + $151,200 = $344,400

Cash Payments

• Materials purchases: as calculated above ($120,000). Payment timing: 70% in month of purchase, 30% in following month.
• Direct labor and variable overhead: paid in the same month.
• Fixed overhead and operating expenses: paid in the month incurred, excluding property taxes of three months paid in October.
• Interest payments on borrowings are calculated based on the outstanding balance at the start of each month at 1%. Borrowings and repayments are in $100 increments.

Calculations and Borrowings

Starting with an initial cash of $10,000 in October, the cash collections are added to this balance. Deducting operating expenses, materials payments, and other scheduled disbursements provides the pre-borrowing ending cash balance. If this balance falls below $10,000, Manny will borrow enough to reach the minimum, in $100 increments. Interest on any borrowings accrues at 1% monthly on the beginning balance of the month and is paid at the start of the subsequent month.

Monthly Summary

Repeating similar calculations for November and December, adjusting for varying sales, collections, and expenses, establishes the cash flow pattern. The total quarter summarizes the cash position, cumulative borrowings, repayments, and interest expenses, ensuring a comprehensive liquidity plan that maintains required minimum balances and manages ongoing obligations effectively.

Explain why Manny will be facing a cash flow problem in October even though his business is profitable.

Despite a profitable business outlook, Manny faces a cash flow problem in October primarily because of the timing mismatch between cash inflows and outflows. Profits are recognized based on sales and expenses incurred, but actual cash receipts lag behind due to credit sales collection procedures. For instance, Manny’s sales are on credit, with only 20% collected in the month of sale, and the remaining 80% collected in subsequent months. Conversely, substantial cash outflows occur immediately for raw materials, labor, overhead, and fixed expenses. Additionally, fixed costs like property taxes are paid upfront, further straining immediate cash availability.

This disconnect results in insufficient cash despite positive net income, especially during October when previous sales collections are minimal, but expenses are high. The need to fund operations via short-term borrowing highlights the importance of effective cash flow management. Therefore, profitability does not guarantee liquidity; timing of cash flows is crucial in avoiding shortfalls and maintaining financial stability.

References

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