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P9-1B Mercer Farm Supply Company

Price: $2.50

Mercer Farm Supply Company manufactures and sells a fertilizer called Basic II.
The following data are available for preparing budgets for Basic II for the first 2 quarters
of 2014.

1. Sales: quarter 1, 40,000 bags; quarter 2, 50,000 bags. Selling price is $63 per bag.

2. Direct materials: each bag of Basic II requires 5 pounds of Crup at a cost of $3.80 per
pound and 10 pounds of Dert at $1.50 per pound.

3. Desired inventory levels:

Type of Inventory  1-Jan 1-Apr 1-Jul
Basic II (bags)  10,000 15,000 20,000
Crup (pounds)  9,000 12,000 15,000
Dert (pounds)  15,000 20,000 25,000

4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $12 per hour.

5. Selling and administrative expenses are expected to be 10% of sales plus $150,000 per

6. Income taxes are expected to be 30% of income from operations.
Your assistant has prepared two budgets: (1) The manufacturing overhead budget
shows expected costs to be 100% of direct labor cost. (2) The direct materials budget for
Dert which shows the cost of Dert to be $682,500 in quarter 1 and $832,500 in quarter 2.

Prepare the budgeted income statement for the first 6 months of 2014 and all required
supporting budgets by quarters. (Note: Use variable and fixed in the selling and administrative
expense budget.) Do not prepare the manufacturing overhead budget or the direct
materials budget for Dert.

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