The balance sheet of Watson Company as of December 31, 20X1, follows.
December 31, 12X1
Accounts receivable 10,000
Finished goods (575 units x $7.00) 4,025
Direct materials (2,760 units x $0.50) 1,380
Plant & equipment $50,000
Less: Accumulated depreciation 10,000 40,000
Total assets $60,000
Liabilities & Stockholders’ Equity
Accounts payable to suppliers $14,000
Common stock $25,000
Retained earnings 21,000 46,000
Total liabilities &. stockholders’ equity $60,000
The following information has been extracted from the firm’s accounting records:
1. All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first five months of 20X2 are: January, 1,500 units,- February, 1,600 units; March, 1,800 units; April, 2,000 units; May, 2,100 units.
2. Management wants to maintain the finished goods inventory at 30% of the following month’s sales.
3. Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next six months. Management wants to maintain the ending direct materials inventory at 60% of the following month’s production needs.
4. Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.
5. Watson’s product requires 30 minutes of direct labor time. Each hour of direct labor costs $7.