Hardex Inc is a manufacturer of commercial and heavy industrial pipe nozzles. The firm’s two product lines are called Easyflow and Heavyflow nozzles. The primary raw materials are flexible steel sheets, and 15cm x 13cm of plastic sheets. Each Easyflow nozzle requires a 2/3 of a meter and a Heavyflow nozzle requires a one metre of steel sheet. Allowing for normal breakage and scrap steel sheet, the company can cut either enough to make four Easyflow or two Heavy flow nozzles from a single steel sheet. Other raw materials are costly and treated as indirect materials. Karen Shaw, Hardex Inc.’s accountant has gathered the following information in preparation for the company’s annual budget for the next year.

• Sales in the fourth quarter of the current year are expected to be 50,000 Easyflow and 40,000 Heavyflow nozzles. The sales manager predicts that, over the next two years, sales in each product line will grow by 5000 units each quarter over the previous quarter.
• Hardex’s sales history indicates that 60 per cent of all sales are on credit, with the remainder of the sales in cash. The company’s experience shows that 80 per cent of the credit sales are collected during the quarter in which the sales are made, while the remaining 20 per cent are collected in the following quarter. There are no bad debts.
• The Easyflow sells for $10 and Heavyflow for $15. These prices are expected to increase by 5% in the third quarter of the budget year.
• Hardex’s production manager tries to end each quarter with enough finished goods inventory in each product line to cover 20 per cent of the following quarter’s sales. In addition, an attempt is made to end each quarter with 20 per cent of the plastic sheets needed for the following quarter’s production. Since steel sheets are purchased locally, Hardex buys them on a just-in-time basis.
• All of Hardex’s direct material purchases are on credit, and 80 per cent of each quarter’s purchases are paid in cash during the same quarter as the purchases are made. The other 20 per cent are paid in the next quarter.
• Indirect materials are purchased as needed for cash.
• Work in process inventory in negligible.
• Projected manufacturing costs for each product in the budget year are as follows:

• The predetermined overhead rate is $10 per direct labour hour. Overhead costs incurred are paid in the quarter in which they are incurred. Following is the itemised budgeted manufacturing overhead costs.

• Hardex Inc’s expected quarterly selling and administrative expenses are $100,000 to be paid in cash.
• Karen Shaw anticipates that dividends of $50,000 will be declared and paid in cash each quarter.
• Hardex’s projected balance sheet as 31 December of the current year is as follows:

Additional information:

• The CEO has decided to invest in purchasing in a fully automated electric machine which is expected to increase production significantly. The acquisition of the new machine will take place at the start of January next year. The machine will cost $950,000 and there will be an additional $50,000 of equipment purchase to allow the machine to operate. The purchase will be financed with a $1,000,000 loan from National Australia Bank. The CEO has negotiated a repayment schedule of four equal instalments, payable on the last day of each quarter. The interest rate is 10 per cent and interest is also paid quarterly.

Required:

Prepare Hardex’s annual budget (by quarter) for the next year by completing:

• Sales budget
• Cash receipt budget
• Production budget
• Direct material budget
• Cash payments budget
• Cash budget
• Budgeted schedule of cost of goods manufactured and sold (hint: in the budget, actual and applied overhead will be equal)
• Budgeted income statement (ignore income tax)
• Budgeted balance sheet as of 31 December of the budget year

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