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Assingment 3 (2/58)

1. A sales budget is given below for one of the products manufactured by the Key Co.:

The inventory of finished goods at the end of each month must equal 20% of the next
month's sales. On December 31, the finished goods inventory totaled 4,000 units.
Each unit of product requires three specialized electrical switches. Since the production of
these specialized switches by Key's suppliers is sometimes irregular, the company has a
policy of maintaining an ending inventory at the end of each month equal to 30% of the next
month's production needs. This requirement had been met on January 1 of the current year.
Required:
Prepare a budget showing the quantity of switches to be purchased each month for January,
February, and March and in total for the quarter.
Answer:
The company's production budget is as follows:

The materials purchases budget (based on the above production budget) would be as follows:

*69,000 x 0.30 =20,700

**38,000 x 3 = 114,000; 114,000 x 0.30 = 34,200

2. Weltin Industrial Gas Corporation supplies acetylene and other compressed gases to

industry. Data regarding the store's operations follow:

Sales are budgeted at $390,000 for November, $370,000 for December, and $380,000 for
January.
Collections are expected to be 90% in the month of sale, 5% in the month following the
sale, and 5% uncollectible.
The cost of goods sold is 60% of sales.
The company purchases 70% of its merchandise in the month prior to the month of sale and
30% in the month of sale. Payment for merchandise is made in the month following the
purchase.
Other monthly expenses to be paid in cash are $21,800.
Monthly depreciation is $18,000.
Ignore taxes.

Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.
c. Prepare Cash Budgets for November and December.
d. Prepare Budgeted Income Statements for November and December.
e. Prepare a Budgeted Balance Sheet for the end of December.