Reference no: EM132101338

Problem - The results of operations for the Preston Manufacturing Company for the fourth quarter of 2014 were as follows:

Sales		$510,000
Less variable cost of sales		306,000
Contribution margin		204,000
Less fixed production costs	$102,000
Less fixed selling and administrative expenses	51,000	153,000
Income before taxes		51,000
Less taxes on income		20,400
Net income		$30,600

Note: Preston Manufacturing uses the variable costing method. Thus, only variable production costs are included in inventory and cost of goods sold. Fixed production costs are charged to expense in the period incurred.

The company's balance sheet as of the end of the fourth quarter of 2014 was as follows:

Assets:
Cash	$160,000
Accounts receivable	255,000
Inventory	378,000
Total current assets	793,000
Property, plant, and equipment	500,000
Less accumulated depreciation	120,000
Total assets	$1,173,000
Liabilities and owners' equity:
Accounts payable	48,960
Common stock	529,000
Retained earnings	595,040
Total liabilities and owners' equity	$1,173,000

Additional information:

1. Sales and variable costs of sales are expected to increase by 10 percent in the next quarter.

2. All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the following quarter.

3. Variable cost of sales consists of 40 percent materials, 40 percent direct labor, and 20 percent variable overhead. Materials are purchased on credit. 60 percent are paid for in the quarter of purchase, and the remaining amount is paid for in the quarter after purchase. The inventory balance is not expected to change. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred.

4. Fixed production costs (other than $8,000 of depreciation expense) are expected to increase by 1 percent. Fixed production costs requiring payment are paid in the quarter they are incurred.

5. Fixed selling and administrative costs (other than $7,000 of depreciation expense) are expected to increase by 3 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred.

6. The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred.

7. No purchases of property, plant, or equipment are expected in the first quarter of 2015.

Prepare a budgeted income statement for the first quarter of 2015.