High Spirits Company (HSC) manufactures a high end infused vodka. It buys unrefined gain alcohol from various suppliers. The alcohol is passed through charcoal filters multiple times and then is infused with a secret blend of herbs and other botanicals. Once the vodka is ready, it is bottled and sold to local bars and restaurants.
Estimated sales (in bottles) for the second and third quarter of 2021 appear below:
HSC sells their vodka for $24 a bottle. The company sold 50,000 bottles in the month of March. Sales to bars and restaurants are all on account. History has shown that 65% of sales are collected in the same month that the sale occurred and 30% is collected in the month following the sale. The remaining 5% is never collected and is written off as bad debts.
At the end of each month, HSC maintains an inventory of vodka bottles equal to 30% of the next month’s forecasted sales. This requirement was met at the end of March 2021.
Each bottle of finished vodka requires 2 liters of grain alcohol to manufacture. Company policy dictates that inventory of grain alcohol at the end of each month must equal 25% of the following month’s production needs. On March 31, 2021, HSC will have 42,000 litres of grain alcohol on hand. HSC pays $11.50 for every liter of grain alcohol purchased. The company pays 25% of its alcohol purchases in the month of purchase and the remaining 75% is paid the following month. The accounts payable related to alcohol purchase totalled $862,500 at the end of March 2020.
1. Prepare a Sales budget in units and dollars for the second quarter of 2021. Your budget must show each month individually as well as the total for the quarter.
2. Prepare a production budget for the second quarter of 2021. Your budget must show each month individually as well as the total for the quarter.
3. Prepare a materials purchase budget for HSC, by month and in total, for the second quarter of 2021.
4. Prepare a schedule for the second quarter of 2021 showing cash collections from sales for each month individually as well as the total for the quarter.
5. Prepare a schedule showing the expected payments for materials, by month and in total, for the second quarter of 2021.
CCM produces a variety of hockey equipment. The company’s stick division manufactures three hockey sticks – the Standard, the Deluxe and the Pro – that are widely used by amateur players. Selected information on the sticks is given below:
Standard Deluxe Pro
Selling price $40.00 $60.00 $90.00
Variable cost per stick:
Production 22.00 27.00 31.50
Selling (5% of selling price) 2.00 3.00 4.50
All sales are made through the company’s own retail stores. The cost records show that the following fixed costs are assignable to the stick division:
Production costs $120,000
Advertising expenses 100,000
Administrative salaries 50,000
Total fixed costs $270,000
Sales, in units, for the month of April and May are as follows:
Standard Deluxe Pro
April 2,000 1,000 5,000
May 8,000 1,000 3,000
1. Using the contribution margin approach, prepare income statements for the month of April and an income statement for the month of May. Your income statements should show separate columns for the three different types of sticks and a final column for the three sticks in total. Do not try to allocate the fixed costs to the different sticks; simply place the fixed expenses in the total column.
2. Calculate the contribution margin, in dollars and % for the three sticks.
3. How can you explain the fact that although total sales increased in May, profits decreased?
4. Calculate CCM’s break-even point in dollars for the month of April
5. Assuming that sales of Standard sticks increase by $20,000, how would net income be affected?