Morganton Company Makes One Product And It Provided The Foll

Morganton Company Makes One Product And It Provided the Following Info

Morganton Company makes one product and it provided the following information to help prepare the master budget: The budgeted selling price per unit is $60. Budgeted unit sales for June, July, August, and September are 8,900, 20,000, 22,000, and 23,000 units, respectively. All sales are on credit. Forty percent of credit sales are collected in the month of the sale and 60% in the following month. The ending finished goods inventory equals 20% of the following month’s unit sales. The ending raw materials inventory equals 10% of the following month’s raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.50 per pound. Thirty percent of raw materials purchases are paid for in the month of purchase and 70% in the following month. The direct labor wage rate is $13 per hour. Each unit of finished goods requires two direct labor-hours. The variable selling and administrative expense per unit sold is $1.50. The fixed selling and administrative expense per month is $70,000. If we assume that there is no fixed manufacturing overhead and the variable manufacturing overhead is $7 per direct labor-hour, what is the estimated net operating income for July?

Paper For Above instruction

To determine the estimated net operating income for July for Morganton Company, we must analyze and calculate several key components based on the provided data. These components include sales revenue, cost of goods sold (COGS), selling and administrative expenses, and relevant budgets for production, raw materials, direct labor, and manufacturing overhead.

Sales Revenue

The budgeted units sold in July are 20,000 units. Given the selling price per unit of $60, the total sales revenue for July is:

20,000 units × $60 = $1,200,000

Cost of Goods Sold (COGS)

To compute COGS, we need the number of units sold in July and the inventory adjustments. The beginning finished goods inventory for July is the ending inventory of June, which is 20% of July sales (20,000 units):

Beginning finished goods inventory for July = 20% of July sales = 0.20 × 20,000 = 4,000 units

The ending finished goods inventory for July is 20% of August sales (22,000 units):

Ending finished goods inventory = 0.20 × 22,000 = 4,400 units

The number of units to be produced in July is:

Units needed to be sold in July = 20,000 units

Plus: Ending inventory = 4,400 units

Minus: Beginning inventory = 4,000 units

Units to produce in July = (20,000 + 4,400 - 4,000) = 20,400 units

The raw materials required for production:

Each unit requires 5 pounds of raw materials:

Total raw materials needed = 20,400 units × 5 pounds = 102,000 pounds

Ending raw materials inventory is 10% of July’s raw materials needs:

Ending raw materials inventory = 0.10 × 102,000 = 10,200 pounds

Beginning raw materials inventory for July is the ending raw materials inventory of June, which is 10% of July’s raw materials needs, so:

Beginning raw materials inventory = 10,200 pounds

Purchases of raw materials:

Total raw materials to be purchased in July = Raw materials needed for production plus desired ending inventory minus beginning inventory:

= 102,000 + 10,200 - 10,200 = 102,000 pounds

Cost of raw materials:

Cost per pound is $2.50:

Total raw materials cost for July = 102,000 × $2.50 = $255,000

Raw materials payments:

30% paid in July, 70% in August:

Raw materials paid in July = 0.30 × $255,000 = $76,500

Note: Since direct materials are paid for based on purchases, related expenses are assigned to the months of purchase regardless of production timing.

Direct labor hours:

Each unit requires 2 labor-hours:

Total direct labor-hours = 20,400 units × 2 hours = 40,800 hours

Direct labor wage rate:

$13 per hour:

Total direct labor cost = 40,800 hours × $13 = $530,400

Manufacturing overhead:

Given that fixed manufacturing overhead is zero, only variable manufacturing overhead applies.

Variable manufacturing overhead per labor-hour is $7:

Total variable manufacturing overhead = 40,800 hours × $7 = $285,600

Total manufacturing costs (excluding fixed overhead):

Sum of direct materials, direct labor, and variable manufacturing overhead:

= $255,000 + $530,400 + $285,600 = $1,071,000

Cost per unit:

Total manufacturing costs divided by units produced:

Cost per unit = $1,071,000 ÷ 20,400 ≈ $52.50

COGS for July:

Units sold = 20,000:

COGS = 20,000 units × $52.50 ≈ $1,050,000

Selling and Administrative Expenses

Variable selling and administrative expenses per unit are $1.50:

Variable expenses = 20,000 units × $1.50 = $30,000

Fixed selling and administrative expenses:

Fixed expenses = $70,000

Total selling and administrative expenses:

Total S&A expenses = $30,000 + $70,000 = $100,000

Collection of Credit Sales

Revenue collections:

40% of July sales are collected in July:

Collections from July’s sales = 40% of $1,200,000 = $480,000

60% of June sales (which were 8,900 units at $60):

June sales revenue = 8,900 × $60 = $534,000

Collections from June sales in July = 60% of $534,000 = $320,400

Total cash collections in July = $480,000 + $320,400 = $800,400

Net Operating Income Calculation

Now, we can calculate:

- Total sales revenue: $1,200,000

- Less: COGS: $1,050,000

- Less: Selling & administrative expenses: $100,000

The operating income before considering non-cash expenses and taxes is:

= $1,200,000 - $1,050,000 - $100,000 = $50,000

Note: The collection of receivables impacts cash flow but does not directly affect net operating income, which is based on accounting profit.

Therefore, the estimated net operating income for July is approximately $50,000.

Conclusion

The net operating income reflects the profitability after deducting all costs associated with manufacturing, selling, and administrative expenses, considering the assumptions of no fixed manufacturing overhead and only variable overhead overheads. The calculated figure provides valuable insight into Morganton's operational efficiency and profitability for July.

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