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MUST COMPLETE BOTH PARTS IN THEIR ENTIRETY!
Course Project A
For Project A, you will need to review the Course Project Instructions in Document Sharing. An Excel template file can be also found in Doc Sharing. Use it to do your master budget and supporting schedules. This project will help you learn and understand what a master budget is and how it is prepared. When you have completed Project A, upload it into the Dropbox. There will be a discussion thread area in Weeks 4 and 5 that you can use to ask questions about the project.
See Syllabus, Due Dates for Assignments & Exams, for due date information.
Course Project B
Clark Paints: The Production Department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost $200,000, with a disposal value of $40,000, and it would be able to produce 5,500,000 cans over the life of the machinery. The Production Department estimates that approximately 1,100,000 cans would be needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees, working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ each if purchased from the current supplier. The company’s minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint, as well as the number of units sold, will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.
Required:
1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase:
Annual cash flows over the expected life of the equipment;
Payback period;
Annual rate of return;
Net present value; and
Internal rate of return.
2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short, double-spaced Word paper elaborating and supporting your answer.
>Solution
5
in 5 years
per can
,100,000 cans per year
Amount Annual rate of return
Annual cash savings income
Net Present Amount Amount Value 0 0 Present Item Year Amount Tax % Amount Factor Value Item Year Amount Tax % Amount Factor Value Annual cash savings Net Present Value 0 1 2 3 4 5
COURSE PROJECT A INSTRUCTIONS
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. A listing of the company’s ledger accounts as of March 31 is given below: The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: · 1. · a. A sales budget, by month and in total. · b. A schedule of expected cash collections from sales, by month and in total. · c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. · d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. · 2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000. · 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. · 4. A budgeted balance sheet as of June 30. April May June Quarter Collections
April May June Quarter April May June Quarter April May June Quarter EARRINGS UNLIMITED – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 EARRINGS UNLIMITED assets
Total
AC
5
0
Part B
Capital Budgeting problem
Clark Paints
Data:
Cost of new equipment
Expected life of equipment in years
Disposal value
Life production – number of cans
Annual production or purchase needs
Initial training costs
Number of workers needed
Annual hours to be worked per employee
Earnings per hour for employees
Annual health benefits per employee
Other annual benefits per employee-% of wages
Cost of raw materials per can
Other variable production costs
Costs to purchase cans – per can
Required rate of return
Tax rate
Make
Purchase
Cost to produce
Annual cost of direct material:
Need of
1
Annual cost of direct labor for new employees:
Wages
Health benefits
Other benefits
Total wages and benefits
Other variable production costs
Total annual production costs
Annual cost to purchase cans
Part 1 Cash flows over the life of the project
Before Tax
After Tax
Item
Amount
Annual cash savings
Tax savings due to depreciation
Total annual cash flow
Part 2 Payback Period
Part
3
Accounting income as result of decreased costs
Less Depreciation
Before tax income
Tax at 35% rate
After tax
Part
4
Present
Value
Before Tax After tax
12% PV
Item
Year
Tax %
Factor
Cost of machine
Cost of training
Annual cash savings
1-5
Tax savings due to depreciation 1-5
Disposal value 5
Net Present Value
Part 5 Internal Rate of Return
Before Tax After tax
18% PV
Cost of machine 0
Cost of training 0
Annual cash savings 1-5
Tax savings due to depreciation 1-5
Disposal value 5
Net Present Value
Before Tax After tax Present
Cost of machine 0
Cost of training 0
Annual cash savings 1-5
Tax savings due to depreciation 1-5
Disposal value 5
Net Present Value
Before Tax After tax Present
Item Year Amount Tax % Amount Factor Value Cost of machine
Cost of training
Tax savings due to depreciation Disposal value
Excel Function method to calculate IRR
After Tax
Item Year Amount
Cost of machine and training
Year 1 inflow
Year 2 inflow
Year 3 inflow
Year 4 inflow
Year 5 inflow
The IRR function will require the range of cash flows beginning with the initial cash outflow for the investment
and progressing through each year of the project. You also have to include an initial “guess” for the
possible IRR. The formula is: =IRR(values,guess)
IRR Function
Project A Case 9-30
PROJECT A – Case 9-30
Student Name:
SALES BUDGET:
April
May
June
Quarter
Budgeted unit sales
Selling price per unit
Total Sales
SCHEDULE OF EXPECTED CASH COLLECTIONS:
February sales
March sales
April sales
May sales
June sales
Total
Cash
MERCHANDISE PURCHASES BUDGET:
Budgeted unit sales
Add desired ending inventory
Total needs
Less beginning inventory
Required purchases
Cost of purchases @ $4 per unit
BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:
Accounts payable
April purchases
May purchases
June purchases
Total cash payments
EARRINGS UNLIMITED
CASH BUDGET
FOR THE THREE MONTHS ENDING
JUNE 30
Cash balance
Add collections from customers
Total cash available
Less Disbursements
Merchandise purchases
Advertising
Rent
Salaries
Commissions
Utilities
Equipment purchases
Dividends paid
Total Disbursements
Excess (deficiency) of receipts
over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Cash balance, ending
BUDGETED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30
Sales
– 0
Variable expenses:
Cost of goods sold
Commissions – 0 – 0
Contribution Margin
Fixed expenses:
Advertising – 0
Rent – 0
Salaries – 0
Utilities – 0
Insurance
Depreciation
Net operating income
Interest expense
Net income
BUDGETED BALANCE SHEET
JUNE 30
Assets:
Cash
Accounts receivable (see below)
Inventory
Prepaid insurance
Property and equipment, net
Total
Liabilities and Stockholders’ Equity
Accounts payable, purchases
Dividends payable
Capital stock
Retained earnings (see below)
Total liabilities and stockholders’ equity
Accounts receivable at June 30:
May sales x ?%
June sales x ?%
Total
Retained earnings at June 30:
Balance, March 31
Add net income
Less dividends declared
Balance, June 30
Sheet2
Sheet3
