Reference no: EM132999328

Smithfield Company manufactures widgets. Smithfield's sales budget shows monthly sales for the upcoming quarter as follows:

July 10,000 units
August 8,000 units
September 12,000 units
October 14,000 units

Each unit sells for $20.00. 80% of sales are on account. Smithfield's collections on sales on account are expected as follows:

65% in the month of the sale
20% in the month following the month of sale
12% in the second month following the month of sale
3% uncollectible

Smithfield's accounts receivable balance as of June 30 is $93,000 (net of expected bad debts which are reserved for), of which $30,000 represents uncollected May sales and $63,000 represents uncollected June sales. These amounts represent what is collectible (uncollectible amounts have been written off).

Company policy is to have a finished goods inventory at the end of each month equal to 20% of the next month's sales. Variable product costs are as follows:

DM (2 pounds of steel at $4 per pound) $8.00
DL (1/4 hour at $12 per hour) $3.00
Variable Overhead (50% of DL) $1.50

Ending inventory levels for raw materials should equal 40% of the production needs for the next month. Smithfield pays for 20% of direct material purchases during the month of purchase, and the remaining 80% is paid during the following month. Other variable costs are incurred and paid during the month of production. The fixed operating costs total $10,000 a month (including depreciation of $3,000). Payments related to fixed overhead are made during the month incurred.

Raw Materials and Finished goods inventories at the beginning of July were in accordance with the company's inventory policy.

Problem 1. What were the total sales for each of the following months?

a. May
b. June

Problem 2. What are the expected cash collections for each of the following months?

a. July
b. August

Problem 3. How many widgets does Smithfield expect to produce during the months of July, August, and September?

Problem 4. What is the RM purchases budget for July and August (in pounds and dollars)?

Problem 5. Prepare a cash budget for August.