Problem 6 - Accounting

Question

Harmony Audio Company manufactures two models of speakers, DL and XL. Based on the following production and sales data for September 2009, prepare (a) a sales budget and (b) a production budget. DL XL Estimated inventory (units), September 1 . . . . . . 240 60 Desired inventory (units), September 30 . . . . . . . 275 52 Expected sales volume (units): East Region . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700 3,250 West Region . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250 3,700 Unit sales price . . . . . . . . . . . . . . . . . . . . . . . . . . \(125 \)195

Step-by-Step Solution

Answer

Total sales budget is $2,349,000. Required production: DL - 7,985 units; XL - 6,942 units.

Step 1: Calculate Total Expected Sales

Add the expected sales volume from both regions for each speaker model. For DL speakers: \[ \text{East Region} + \text{West Region} = 3700 + 4250 = 7950 \text{ units} \] For XL speakers: \[ \text{East Region} + \text{West Region} = 3250 + 3700 = 6950 \text{ units} \]

Step 2: Determine Total Sales Revenue

Multiply the total expected sales volume for each model by the unit sales price to get the total sales revenue. For DL speakers: \[ 7950 \text{ units} \times 125 = 993750 \] For XL speakers:\[ 6950 \text{ units} \times 195 = 1355250 \] Thus, the total sales budget is: \[ 993750 + 1355250 = 2349000 \]

Step 3: Calculate Required Production

To calculate the production required for September, consider the desired ending inventory and the beginning inventory.For DL speakers: \[ \text{Required Production} = (\text{Expected Sales} + \text{Desired Inventory}) - \text{Beginning Inventory} \] \[ = (7950 + 275) - 240 = 7985 \text{ units} \] For XL speakers:\[ \text{Required Production} = (\text{Expected Sales} + \text{Desired Inventory}) - \text{Beginning Inventory} \] \[ = (6950 + 52) - 60 = 6942 \text{ units} \]

Key Concepts

Inventory Management

In sales and production budgeting, effectively managing inventory is crucial. This helps maintain balance between supply and demand.
For companies like Harmony Audio, inventory management involves closely monitoring the beginning and ending stock levels. This ensures production meets sales needs without excess, which can be costly.

• **Beginning Inventory:** This is what a company starts with at the beginning of each period. For Harmony Audio, the DL speakers had 240 units on hand at the start of September.
• **Desired Ending Inventory:** This is the stock level a company plans to have by period end. Harmony aims to hold 275 units of DL speakers by September 30.

Balancing these elements means calculating the additional units to produce. This prevents shortages that might lead to lost sales, and it avoids overproduction, which can tie up valuable resources. It’s a strategic balance companies must master to optimize their operations.
Keeping an eye on changes in inventory levels between months can thus help predict future production needs. This allows the company to plan for increased production in high-demand months or scale back during slower periods, keeping warehousing costs to a minimum.

Expected Sales Volume Calculation

Calculating expected sales volume involves forecasting how much product will sell over a future period. This helps businesses like Harmony Audio plan their production accordingly.
For the DL and XL speakers, expected sales volume is derived from summing the forecasted units sales in all regions.

• **DL Speakers:** Expected sales in the East are 3,700 units, and in the West, it's 4,250 units. This gives a total of 7,950 units expected to sell.
• **XL Speakers:** Sales expected are 3,250 units in the East and 3,700 units in the West, totaling 6,950 units.

This calculation is critical because it offers a target to aim production efforts at. With precise sales forecasting, businesses ensure they produce neither too much nor too little. This optimizes both resources and storage costs.
Accurate sales volume expected can assist in resource allocation, financial planning, and even setting sales targets for the team. It provides a business roadmap, indicating areas potentially requiring marketing focus or identifying growth opportunities.

Total Sales Revenue Calculation

The total sales revenue is the gross income from product sales within a period. Calculating it enables companies to measure success against sales objectives.
Each speaker model at Harmony Audio has a specific unit sales price, which is crucial to this calculation.

• **DL Speakers:** Multiply the expected sales volume by the unit price. With 7,950 units expected to sell at \(125 each, the revenue is calculated as \( 7950 \times 125 = 993750 \).
• **XL Speakers:** An expected sales of 6,950 units at a unit price of \)195 results in a revenue of \( 6950 \times 195 = 1355250 \).

Adding these, the total sales revenue envisaged is \( 993750 + 1355250 = 2349000 \).
This number gives Harmony Audio insight into potential profit margins and financial health over the period. Understanding total expected revenue assists in cash flow management, indicating how much can be reinvested or saved.
Tracking whether actual revenue meets or deviates from expectations can inform future budgeting cycles, helping refine sales strategies and improve accuracy in forecasts.