Session 7 Practice Questions – Profit Planning

MULTIPLE CHOICE

1. Rodriquez Company budgeted the following sales in units:

January 30,000
February 20,000
March 40,000

Rodriquez's policy is to have 20% of the following month's sales in inventory. On January 1, inventory
equaled 7,500 units. February production in units is:
a. 20,000.
b. 28,000.
c. 40,000.
d. 26,500.
e. 24,000.

Figure 9-1.
Diamond Company budgeted the following production in units for the first quarter of the year:

January 30,000
February 20,000
March 40,000

Each unit requires 3 pounds of raw material. Diamond's policy is to have 20% of the following month's
production needs for materials in inventory. On January 1, the raw materials inventory equaled 11,000
pounds.

2. Refer to Figure 9-1. Raw materials purchases budgeted for February in pounds equal:
a. 72,000.
b. 32,000.
c. 91,000.
d. 30,000.
e. 54,000.

3. Refer to Figure 9-1. Desired ending inventory for January in pounds equals:
a. 12,000
b. 6,000
c. 3,000
d. 4,000
e. 11,000
 Figure 9-2.
Wilmer Company produces two products: OldX and NewX. Budgeted sales for four months are as follows:

OldX NewX
May 10,000 40,000
June 20,000 70,000
July 15,000 80,000
August 30,000 90,000

Wilmer's ending inventory policy is that OldX should have 10% of next month's sales in ending inventory and
NewX should have 20% of next month's sales in ending inventory. On May 1, there were 1,000 units of OldX
and 9,000 units of NewX.
NewX requires 4 units of component A. (OldX does not use component A.) There were 2,100 units of
component A in inventory on May 1. Wilmer wants to have 30 percent of the following month's production
needs in inventory for Component A.

4. Refer to Figure 9-2. How many units of NewX are budgeted for production in June?
a. 70,000
b. 72,000
c. 86,000
d. 45,000
e. 64,000

5. Refer to Figure 9-2. What is budgeted production of OldX for May in units?
a. 11,000
b. 12,000
c. 10,000
d. 13,000
e. 14,000

6. Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May?
a. 288,000
b. 180,000
c. 264,300
d. 64,500
e. 66,600

7. Refer to Figure 9-2. What is the desired ending inventory of component A for May?
a. 86,000
b. 180,000
c. 58,500
d. 86,400
e. 2,100

8. A company has had stable sales and production for several years. Next year, sales are expected to increase by
at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished
product and direct materials purchases, what will be the likely effect on the desired ending inventory of
finished product?
a. it will increase
b. it will decrease
c. it will stay the same
d. none of these
e. it will be twice the size of the desired ending inventory of raw materials
 9. A company expects the following sales for the coming year:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Units 40,000 30,000 60,000 80,000
Average selling price $5 $5 $5 $6

Budgeted sales revenue for the year is

a. $1,050,000
b. $1,260,000
c. $1,155,000
d. $1,130,000
e. it is impossible to tell from this information

10. A company provided the following information on sales for the coming year:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Units 40,000 40,000 30,000 80,000
Average selling price $5 $5 $5 $6

Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next
quarter's sales in ending inventory, which quarter will have the lowest production?
a. Quarter 4
b. Quarter 3
c. Quarter 2
d. Quarter 1
e. All quarters have the same production

Since Quarter 4 must have production that is at least 60,000 (80,000 + some level of desired ending inventory
− 20,000), Quarter 2 is the lowest.

11. Belant Company budgeted 200,000 units for June, 210,000 for July and 300,000 for August. Each unit
requires 0.25 direct labor hours. How many direct labor hours are budgeted for August?
a. 50,000
b. 5,000
c. 75,000
d. 52,500
e. 300,000
OPEN ENDED PROBLEMS

1. Jones Corporation has the following budgeted sales for the selected six-month period:

Month Unit Sales

June 15,000
July 20,000
August 35,000
September 25,000
October 30,000
November 20,000

There were 7,500 units of finished goods in inventory at the beginning of June. Plans are to have an inventory
of finished product equal to 20 percent of the unit sales for the next month.

Three pounds of materials are required for each unit produced. Each pound of material costs $20. Inventory
levels for materials equal 30 percent of the needs for the next month. Materials inventory on June 1 was 5,000
pounds.

Required:
A. Prepare production budgets in units for July, August, and September.
B. Prepare a purchases budget in pounds and dollars for July, August, and September.

2. Shorter Company developed the following data for the month of June.

1. June 1 cash balance $2,300

2. Cash sales in June $67,000
3. Credit sales for June are $20,000; for May $10,000; and for April $16,000. 60% of credit
sales are collected in the month of sale, 20% in the following month, and 10% in the
second month following the sale.
4. Purchases for May were $34,000 and for June are $40,000. Half of purchases are paid in
the month of purchase and the remainder in the following month.
5. June salaries are $28,400, utilities are $1,090, and depreciation on the building is $1,000.

A. Anticipated cash receipts from accounts receivable in June equal

$__________________.
B. Anticipated total cash available in June is $__________________.
C. June cash payments for purchases are $__________________.
D. Anticipated cash balance on June 30 is $__________________.

3. Rivers Company purchases merchandise on account. In general, Rivers pays 50% in the month of purchase
and 50% in the following month. All payments in the month of purchase qualify for a 2% cash discount. First
quarter budgeted purchases are:

January $90,000
February 80,000
March 96,000

A. What are the total cash disbursements expected in February?

B. What are the total cash disbursements expected in March?
C. Now suppose that there is no cash discount for purchases made in the month of
purchase. Now what are the total cash disbursements expected in February? In March?