Practice Questions on Budgeting

Problem 1
Fresh Pak corporation manufactures two types of cardboard boxes used in shipping canned food, fruit, and
Vegetables. The canned Food box (type C) and the perishable food box (type P) have the following material and
labour requirements.

Type of Box
C P
Direct material required per 100 boxes:
Paper board ($. 20 per pound) 30 pounds 70 pounds
Corrugating medium ($. 10 per pound) 20 pounds 30 pounds
Direct labour required per 100 boxes ($. 12.00 per hour) .25 hour .50 hour

The following production – overhead costs are anticipated for the next year. The predetermined overhead rate on a
production volume of 4,95,000 units for each type of box. Production overhead is applied on the basis of direct –
labor hours.

In ($)
Indirect material 10,500
Indirect labor 50,000
Utilities 25,000
Property taxes 18,000
Insurance 16,000
Depreciation 29,000
Total $ 1,48,500

The following selling and administrative expenses are anticipated for the next year.

In ($)
Salaries and fringe benefits of sales personnel 75,000
Advertising 15,000
Management salaries and fringe benefits 90,000
Clerical wages and fringe benefits 26,000
Miscellaneous administrative expenses 4,000
Total 2,10,000

The sales forecast for the next year is as follows:

Sales volume Sales price

Box type C 5,00,000 boxes $ 90.00 per hundred boxes
Box type p 5,00,00 boxes $ 130.00 per hundred boxes

The following inventory information is available for the next year. The unit production costs for each product are
expected to be the same this year and next year.

Expected Inventory (January 1) Desired ending Inventory (December 31)

Finished gods:
Box type C 10,00 boxes 5,000 boxes
Box type P 20,00 boxes 15,000 boxes
Raw material:
paperboard 15,000 pounds 5,000 pounds
Corrugating medium 5,000 pounds 10,000 pounds
Required: prepare the master budget for Fresh Pak corporation for the next year. Assume an income tax rate of 40%.
Include the following schedules.

1. sales budget

2. Production budget

3. Direct-material budget

4. Direct-labor budget

5. Production-overhead budget

6. Selling and administrative expense budget

7. Budgeted income statement (Hint: To determine costs of goods sold, first compute the production cost per unit
for each type of box. Include applied production overhead in the cost.)

Problem 2
City Racquetball club (CRC) offers racquetball and other physical fitness facilities to its members. There are four of
these clubs in the metropolitan area. Each Club has between 1,800 and 2,500 members. Revenue is derived from
annual membership fees and hourly court fees. The annual membership fees are as follows:

Individual ………………………………………………………… $ 40

Student …………………………………………………………… $ 25

Family ……………………………………………………………… $ 95

The hourly court fees vary from $6 to $10 depending upon the season and the time of day (prime versus non-prime
time).

The peak racquetball season is considered to run the from September through April. During this period, court usage
averages 90 to 100 percent of capacity during prime time (5:00-9:00 p.m.) and 50 to 60 percent of capacity during
the remaining hours. Daily court usage during the off – season (i.e., summer) average only 20 to 40 percent of
capacity.

Most of CRCs membership have September expirations. A substantial amount of the cash receipts is collected during
the early part of the racquetball season due to the renewal of the racquetball season due to the renewal of the
annual membership fees and heavy court usage. However, cash receipts are not as large in the spring and drop
significantly in the summer months.

CRC is considering changing its membership and fee structure in an attempt to change its cash receipts. Under the
new membership plan, only an annual membership fee would be charged, rather than a membership fees plus
hourly court fee. There would be two classes of membership as follows:

Individual …………………………………………………………. $ 250

Family ………………………………………………………………. $ 400

The annual fee would be collected in advance at the time membership application is completed. Member would be
allowed to use the racquetball courts as often as they wish during the year under the new plan.

All the future memberships would be sold under these new terms. Current membership would be honored on the
old basis until they expire. However, a special promotional campaign would be instituted to attract new members
and to encourage current members to convert to the new membership plan immediately.

The annual fees for the individual and family memberships would be reduce to $200 and $300, respectively, during
the two-months promotional campaign. In addition, all memberships sold or renewed during this period would be
for 15 months rather than the normal 1year period. Current members also would be given accredit towards the
annual fee for the unexpired portion of their membership fee, and for al prepaid hourly court fees for league play
that have not yet been used.

CRC’s management estimates that 60 to 70 percent of the present membership would continue with the club. The
most active members (45% of the present membership) would convert immediately to the new plan, while the
remaining members who continue would wait until their current memberships expire. Those members who would
not continue are not considered active (i.e., they play 5 or less time during the year). Management estimates that
the loss of members would be offset fully by new members within 6 months of instituting the new plan.
Furthermore, many of the new members would be individuals who would play during non-prime time. Management
estimates that adequate quote time will be available for all members under the new plan.

If the new membership plan is adopted it would be instituted on Feb 1, Well before the summer season. The special
promotional campaign would be conducted during march and April. Once the plan is implemented, annual renewal
of memberships and payment of fees would take place as each individual or family membership expires.

Required: Your consulting firm has been hired to help CRC evaluate its new fees structure. Write a letter to the
club’s

President answering the following questions.

1. Will City Racquetball club’s new membership plan and fee structure improve its ability to plan its cash receipts?
Explain your answer.

2. City Racquetball Club should evaluate the new membership plan and fee structure completely before it decides to
adopt or reject it.

a. Identify the key factors that CRC should consider in its evaluation.

b. Explain what type of financial analyses CRC should prepare in order to make a complete evaluation.

3. Explain how City Racquetball Club's cash management would differ from the present if the new membership plan
and fee structure were adopted.