7.

1 Problem

ANGEL Trading Company presents the actual sales for the first three months of year
2018 on its two products as follows:

Product AB Product XY Total Sales

January P340,000 P540,000 P880,000
February 374,000 567,000 941,000
March 411,400 595,350 1,006,750
The business expects that the trends for the past three months will continue in April and May
2019.

Required: Determine the projected sales for April and May 2019 for the two products. Round the
amounts to thousand pesos.

Product AB Product XY Total Sales

April P453,000 625,000 P1,078,000
May 498,000 656,000 1,154,000
The projected sales for April and May 2019 for the two products are P2,232,000
(P1,078,000+P1,154,000).

Solution for the month of April and May:

The trend from January to February and February to March from product AB is 1.1 while for
product XY the trend is 1.05

April

Product AB- P 411,400 x 1.1 = P453,000

Product XY- P 595,350 x 1.05= P625,000

May

Product AB- P 453,000 x 1.1 = P498,000

Product XY- P 625,000 x 1.05= P656,000

7.2 Problem
 PRINCESS Processing Company has two products. The actual sales data for the past two
years are shown as follows:

Product AB Product CD
Units Unit Price Units Unit Price
2017 25,000 P40 30,000 P60
2018 27,000 42 33,000 63
PRINCESS expects that the percentage of increase in sales volume in 2018 against that in
2017 will be the same in 2019. However, the business predicts that the selling price in 2018 will
be the same the following year.

Required: Prepare the sales budget in 2019

PRINCESS Processing Company

Sales Budget
For year 2019

Product AB

Selling Units Estimated Price Sales

Projected Sales (27,000x1.08) P 29,160 P42 P1,225,000

Product CD

Projected Sales (33,000x1.10) P 36,300 P63 P2,287,000

*The sales are rounded to thousands. The total sales for the two products are P3,512,000
(P1,225,000+ P2,287,000)

7.3 Problem

HYZEL Manufacturing Company sold 12,000 units of product RR in 2018. It expects in

increase its sales volume by 10% increase next year. The inventory data of Product RR are as
follows.

Beginning inventory (actual) 3,000 units

Ending inventory (estimated) 4,500 units

Required: Determine the number of units that must be produced by HYZEL Manufacturing
Company.

HYZEL Manufacturing Company

Production Budget
For year 2019

Number of units to sell P13,200

Add: Plan inventory level 4,500

Total 17,700

Less: Beginning inventory 3,000

Estimated number of units to produce 14,700

7.4 Problem

IZZY Manufacturing Company has one product line- Product WZ. Last year, the
company has sold 40,000 units at P40 per unit. Next year, the business expects to increase its
sales volume by 10%. There are no beginning and ending finished goods inventories.

In the manufacture of one unit of Product WZ, HYZEL uses the three types of direct raw
materials as follows:

Raw Materials AA - 2 units at P4 per unit

Raw Materials BB - 2 units at P5 per unit

Raw Materials CC - 3 units at P7 per unit

There are no beginning and ending raw materials in inventories.

Required: Determine the raw materials requirements to produce the total units planned to be sold
the following year.

IZZY Manufacturing Company

Production Budget
For year 2019
 Raw Materials AA Raw Materials BB Raw Materials
CC

Number of units to produce 44,000 44,000 44,000

Multiplied by: Number per unit 2 2 3

Materials required for production 88,000 88,000 132,000

Multiplied by: Cost per unit P4 P5 P7

Cost to produce the product P352,000 P440,000 P924,000

The raw materials required for production are 308,000 units (88,000+88,000+132,000)

The cost of raw materials is P1,716,000 (P352,000+P440,000+P924,000)

7.5 Problem

JENNY Processing Company expects in 2019 to increase by 10% the products sold the
previous year totaling 40,000 units. At the start of 2019, the company has finished goods of
6,000 units and plans to maintain an inventory of 8,000 at the end of 2019.

To produce one finished product, the company requires 3 units of raw materials OP and 4
units of raw materials QR. One unit of raw materials OP and one unit of raw materials QR comes
P4 and P7, respectively.

The inventory level of the raw materials is as follows:

Material OP Material QR

January 1 (actual) 4,000 3,000

December 31 (target) 3,000 4,000

Required: Determine the estimated cost to purchase the total raw materials requirement.

JENNY Processing Company

Production Budget
For year 2019

Schedule 1:
Number of units to sell 44,000

Add: Plan inventory level 8,000

Total 52,000

Less: Beginning Inventory 6,000

Estimated number of units 46,000

to produce

Schedule 2:

Material OP Material QR

Number of units to produce 46,000 46,000

Multiplied by: Number per unit 3 4

Materials required for production 138,000 184,000

Multiplied by: Cost per unit P4 P7

Cost to produce the product P552,000 P1,288,000

Schedule 3:

Materials required for production 138,000 184,000

Add: Plan ending inventory 3,000 4,000

________ ________

Total 141,000 188,000

Less: Beginning inventory (actual) 4,000 3,000

________ ________

Required Materials to Purchase 137,000 185,000

Multiplied by: Unit price 4 7

________ ________
Cost to purchases P548,000 P1,295,000

The total cost of raw material purchases amounts to P1,843,000 (P548,000+P1,295,000)

Activity #1

The total resources of JENNY Trading as of December 31,2018 is P20,000,000. Of this

amount, P8,000,000 is considered current assets while the remaining balance of P12,000,000 is
for fixed assets.

The equity of the ordinary shareholders amounts to P10,000,000. The earnings before
interest and taxes are expected to be P5,000,000 with 30% applicable tax rate. JENNY is
considering two financing plans o fund the requirements of the assets as follows:

Plan A- P2,000,000 will be sourced from short-term debts at 10% interest, and the remaining
balance of P8,000,000 will be financed through long-term debt at 15% interest.

Plan B- P6,000,000 will be funded by short-term debts at 10% interest, and the P4,000,000 will
be sourced from long-term debts at 15% interest.

Required: Under the two financing plans, compute the return on equity of JENNY Trading

JENNY Trading
As of December 31,2018

Total Resources P 20,000,000 Earnings before interest and taxes P 5,000,000

Current Assets 8,000,000 Tax rate 30%

Fixed Assets 12,000,000

Equity of the Ordinary 10,000,000

Shareholders

Plan A- Conservative

Earnings before interest and taxes P5,000,000

Less: Interest on Borrowing

Short-term (2,000,000 x 10%) P200,000

Long-term (8,000,000 x 15%) P1,200,000 1,400,000

Earnings before tax P3,600,000

Less: tax (3,600,000 x 30%) 1,080,000

Net Income P2,520,000

¿
ROE = Net Income applicable ¿ Ordinary Shares Ordinary Shares Equity

2,520,000
= 10,000,000

ROE = 25.2%

Plan B- Aggressive

Earnings before interest and taxes P5,000,000

Less: Interest on Borrowing

Short-term (6,000,000 x 10%) P600,000

Long-term (4,000,000 x 15%) P600,000 1,200,000

Earnings before tax P3,800,000

Less: tax (3,800,000 x 30%) 1,140,000

Net Income P2,660,000

¿
ROE = Net Income applicable ¿ Ordinary Shares Ordinary Shares Equity

2,660,000
= 10,000,000

ROE = 26.6%

Activity #2

The following information is taken from the records of YVONE Trading Company as of
December 31,2018
 Sales P 2,600,000
Cost of Sales 1,950,000
Inventory 490,000
Accounts Receivable 625,000
Accounts Payable 290,000
Required: Determine the cash conversion cycle of the YVONE Trading Company.

YVONE Trading Company

Cash Conversion Cycle
As of December 31,2018

Inventory
Inventory Conversion Period =
Cost of sales per day

490,000
=
1,950,000/360

= 90.46 or 90

Receivables
Receivable Collection Period=
Sales/360

625,000
=
2,600,000/360

= 86.54 or 87

Payables
Payable Deferral Period=
Cost of Sales/360

290,000
=
1,950,000/360

= 53.54 or 54

Cash Conversion Cycle = ICP + RCP - PDP

= 90+87- 54

= 123 days
Activity #3

JENNY Corporation manufactures special types of beds for the use of elegant hotels. It
buys raw materials every 5th day of the month for P200,000. The suppliers of the raw materials
provide only 20-day credit terms for Jenny. It takes 60 days to convert raw materials into
finished products. Once the products are finished, Jenny sells them to hotels on account. The
buyers are given 30 days to settle their accounts.

Query: What is the cash conversion cycle of JENNY Corporation?

JENNY Corporation

Inventory Conversion Period= 60 days

Receivables Conversion Period= 30 days

Payable Deferral Period= 20 days

Cash Conversion Cycle= ICP+RCP-PDP

= 60+30-20

=70 days

Activity #4

NICANOR Manufacturing Company produces plastic containers for industrial users. The
following data are presented about the company’s operation.

Monthly units produced and sold 600,000 units

Selling price per unit P8.00
Fixed monthly cash payments P240,000
Variable monthly cash payments 40% of sales
Required: Compute the cash break-even point

NICANOR Manufacturing Company

Cash Break-Even Point

Step 1: Determine the cash Contribution Margin

 Cash Sales (600,000 units x P8) P 4,800,000

Less: Variable Cash payment (P4,800,000 x 40%) 1,920,000

Cash Contribution Margin P2,880,000

Step 1: Determine the Cash Contribution Ratio

Cash Contribution Margin P 2,880,000

Divide by: Cash Sales 4,880,000

Cash Contribution Ratio 0.6

Step 1: Determine the Cash Break-Even Point

Fixed Cash Outlay P 240,000

Divide by: Contribution Ratio 0.6

Cash Break-Even P400,000