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Mike’s Floor Polish, Inc.
Mike’s Floor Polish, Inc. (MFP) manufactures a single product, Endless Shine (ES), which is an all-natural, floor polish.Endless Shine is sold only in one gallon containers.
This year, 2019, MFP has prospered, with projected pretax earnings of over $1.1 million on sales of $6.84 million.Management is now in the process of planning next year’s activity.The marketing department has been exploring several avenues for 2020.2019’s healthy sales resulted from a modest advertising and promotional expenditure of $188,000.Marketing management now believes that a concerted digital media campaign in 2020 (that would increase selling and administrative expenses by $125,000) could substantially boost unit sales by as much as 17 percent.
The production department has also proposed a change for 2020.It has suggested that capacity should be boosted from the current 750,000 gallons to 1.1 million gallons.The changes made for this expansion would also reduce variable manufacturing overhead to $1.95 per gallon.The cost of the expansion would be $500,000, consisting mainly of equipment to be purchased in the first quarter of 2020 and to be paid for in March.This increase to plant and equipment would be depreciated over a ten-year period, using the straight line method with no salvage value.A full year’s depreciation would be expensed in the first year.
MFP has the following policies/practices:Ending finished goods inventory generally equals one month’s sales.Raw materials are purchased and delivered on a just‑in‑time basis, so no inventory should exist.Payments on account of purchases of raw material are generally paid in the month following that in which they are incurred.All other expenditures are paid as incurred.Accounts receivable are usually collected 50% in the month of sale, 50% in the month following.All sales are on credit.
The statement of cost of goods manufactured and sold for 2019 and the 2019 income statement (both prepared in October 2019 and reflecting best available estimates at the time) are attached, along with some additional data.
Requirements
1. Mike’s Floor Polish is concerned that the expansion of production capacity may require the company to seek external sources of financing.Prepare a cash budget for the first quarter of 2020 (i.e., schedule the cash inflows and outflows for the quarter).What is the amount of financing that Mike’s Floor Polish will need to arrange for the quarter?
2. Mike’s Floor Polish needs to know what income will be generated for next year.Prepare a statement of budgeted cost of goods manufactured and cost of goods sold for the year 2020. Please prepare a budgeted income statement for 2020.
3. Assume that the marking department has an alternative marketing plan to reduce the price per gallon of Endless Shine by $1.They expect that sales would increase by 20 percent over the 2019 level, even without additional levels of advertising expenditures.Prepare a budgeted income statement for 2020 under this scenario.
4. Should Mike’s Floor Polish accept the new marketing proposal? Please explain.
5. A third plan has also been proposed. This plan calls for a $.50 decrease in the price per gallon and a $400,000 increase in advertising instead of the $125,000 originally proposed. They believe that this would result in a 40% increase in sales over 2019.
6. Should Mike’s Floor Polish accept this new marketing proposal? Please explain.
Mike’s Floor Polish, Inc.
Data Table 2019
Sales (gallons) 570,000
Selling Price $12.00
Fixed Selling & Admin Expenses $986,000.00
(includes depreciation of $36,000)
Commissions (as % of Sales Dollars) 5.00%
Shipping (as % of Sales Dollars)3.00%
Variable Manufacturing Costs (per unit):
Direct Materials $4.00
Direct Labor $1.00
Variable Overhead $2.00
Fixed Manufacturing Costs (total,$180,000.00
includes depreciation of $60,000)
Total Production (gallons) 600,000
December’s Production (gallons) 51,000
Inventory Summary: (gallons)
Finished Goods Inventory, Jan 1 21,000
Finished Goods Inventory, Dec 31 51,000
Budgeted cash balance, Dec 31 $50,000
Mike’s Floor Polish Food Supplements, Inc.
Statement of Cost of Goods Manufactured & Sold
for the Year Ended December 31, 2019
Cost of Goods Manufactured:
Direct Materials $2,400,000.00
Direct Labor 600,000.00
Variable Overhead 1,200,000.00
Fixed Manufacturing Cost 180,000.00
$4,380,000.00Add:
Finished Goods Inventory Jan 1198,000.00
Total Available for Sale$4,578,000.00
Less:
Finished Goods Inventory Dec 31(372,300.00)
Cost of Goods Sold $4,205,700.00
Income Statement
for the Year Ended December 31, 2019
Sales$6,840,000.00
less: Cost of Goods Sold(4,205,700.00)
Gross Margin $2,634,300.00
Fixed Selling & Admin Expense (986,000.00)
Variable Selling & Admin Expense (547,200.00)
Operating Income $1,101,100.00
