Solved by verified expert :Whitefish Point Binoculars, Inc. manufacturers good but inexpensive
binoculars to sell to tourists who come to Whitefish Point in Michigan’s
Upper Peninsula for the annual return of the raptures (i.e., eagles,
hawks, vultures, and falcons) the last weekend of April each year.
Management is now preparing detailed budgets for the third quarter, July
through September, and has assembled the following information about
sales (in units) through November. The selling price of each pair of
binoculars is $50 per pair.
July 6,000
August 7,000
September 5,400
October 4,000
November 3,000
All sales are on account (not cash) and, based on past experience, sales
are expected to be collected in the following pattern: 40% in the month
of sale, 50% in the month following the sale and 10% uncollectible. The
beginning accounts receivable balance (excluding uncollectible amounts)
on July 1 will be $130,000.
Other information about production:
Whitefish maintains finished goods inventories equal to 10% of the
following month’s sales. The inventory of finished goods on July 1 will
be 600 pairs of binoculars. Each pair of binoculars requires 2 pounds of
direct materials (a composite/plastic material). To prevent shortages,
the company would like the inventory of direct materials on hand at the
end of each month to be equal to 20% of the following month’s production
needs. The inventory of direct materials on hand on July 1 will be
2,440. The direct materials cost $2.50 per pound of direct materials.
The company pays for 60% of its purchases in the month of purchase, the
remainder is paid for in the following month.
1. What are the expected sales in dollars for the third quarter (i.e., July-September)?
2. What are the expected cash collections from sales for the third quarter?
3. What is the production budget in units for the month of September?
Hint: It will be helpful to prepare the production budget for the
quarter at this stage to facilitate answering Question #4.
4. What is the direct materials budget for the third quarter?
5. What if direct material prices go up to $3.00 per pound and
management would like to have 30% of the following month’s direct
materials needs on hand at the end of the month? What is the direct
materials budget for the third quarter under these conditions?
