Sweats Galore Case Study

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Instructions

Answer the following questions.

  1. Do you think it was important for Michael to stipulate his four criteria for the business (see page CA-20), including the goal of generating a net income of at least $25,000 annually? Why or why not? CA-22 case 6 Cases for Management Decision-Making WeyFin-Man1E_Cases_ONLINE.indd Page CA-22 04/11/11 3:11 PM user-F408 /Users/user-F408/Desktop/Merry_X-Mas/New 2. If the company has sales of $12,000 during January of the fi rst year of business, determine the amount of variable and fi xed costs associated with utilities and maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.) 3. Using the format below, prepare a sales budget for the year ending 2013. Sweats Galore, Inc. Sales Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Year Expected unit sales Unit selling price Budgeted sales revenue 4. Prepare a schedule of expected collections from customers. Sweats Galore, Inc. Schedule of Expected Collections from Customers For the Year Ending December 31, 2013 Quarter 1 2 3 4 Accounts receivable 1/1/13 –0– First quarter Second quarter Third quarter Fourth quarter Total collections 5. Michael learned from talking with Jayne that the supplier is so focused on making quality sweatshirts that many times the shirts are not available for several days. She encouraged Michael to maintain an ending inventory of shirts equal to 25% of the next quarter’s sales. Prepare a shirt purchases budget for shirts using the format provided. Sweats Galore, Inc. Shirt Purchases Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Year Shirts to be silk-screened Plus: Desired ending inventory Total shirts required Less: Beginning inventory Total shirts needed Cost per shirt Total cost of shirt purchases 6. Prepare a schedule of expected payments for purchases. Sweats Galore, Inc. Schedule of Expected Payments for Purchases For the Year Ended December 31, 2013 Quarter 1 2 3 4 Accounts payable 1/1/13 –0– First quarter Second quarter Third quarter Fourth quarter Total payments case 6 Cases for Management Decision-Making CA-23 WeyFin-Man1E_Cases_ONLINE.indd Page CA-23 04/11/11 3:11 PM user-F408 /Users/user-F408/Desktop/Merry_X-Mas/New 7. Prepare a silk-screen labor budget. Sweats Galore, Inc. Silk-Screen Labor Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Year Units to be produced Silk-screen labor hours per unit Total required silk-screen labor hours Silk-screen labor cost per hour Total silk-screen labor cost 8. Prepare a selling and administrative expenses budget for Sweats Galore, Inc. for the year ending December 31, 2013. Sweats Galore, Inc. Selling and Administrative Expenses Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Year Variable expenses: Sales commissions Total variable expenses Fixed expenses: Advertising Rent Sales salaries Offi ce salaries Depreciation Property taxes and insurance Total fi xed expenses Total selling and administrative expenses 9. Prepare a silk-screen overhead expenses budget for Sweats Galore, Inc. for the year ending December 31, 2013. Sweats Galore, Inc. Silk-Screen Overhead Expenses Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Year Variable expenses: Ink Maintenance Utilities Graphics design Total variable expenses Fixed expenses: Rent Maintenance Utilities Graphics design Property taxes and insurance Depreciation Total fi xed expenses Total silk-screen overhead Direct silk-screen hours Overhead rate per silk-screen hour CA-24 case 6 Cases for Management Decision-Making WeyFin-Man1E_Cases_ONLINE.indd Page CA-24 04/11/11 3:11 PM user-F408 /Users/user-F408/Desktop/Merry_X-Mas/New 10. Using the information found in the case and the previous budgets, prepare a budgeted income statement for Sweats Galore, Inc. for the year ended December 31, 2013. Sweats Galore, Inc. Budgeted Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross profi t Selling and administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income 11. Using the information found in the case and the previous budgets, prepare a cash budget for Sweats Galore, Inc. for the year ended December 31, 2013. Sweats Galore, Inc. Cash Budget For the Year Ended December 31, 2013 Quarter 1 2 3 4 Beginning cash balance Add: Receipts Collections from customers Total available cash Less: Disbursements Payments for shirt purchases Silk-screen labor Silk-screen overhead Selling and administrative expenses Payment for equipment purchase Total disbursements Excess (defi ciency) of available cash over disbursements Financing Borrowings Ending cash balance 12. Using the information contained in the case and the previous budgets, prepare a budgeted balance sheet for Sweats Galore, Inc. for the year ended December 31, 2013. Sweats Galore, Inc. Budgeted Balance Sheet December 31, 2013 Assets Cash Accounts receivable Sweatshirt inventory Equipment Less: Accumulated depreciation Total assets case 6 Cases for Management Decision-Making CA-25 WeyFin-Man1E_Cases_ONLINE.indd Page CA-25 04/11/11 3:11 PM user-F408 /Users/user-F408/Desktop/Merry_X-Mas/New Liabilities and Stockholders’ Equity Accounts payable Notes payable Interest payable Taxes payable Total liabilities Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity 13. (a) Using the information contained in the case and the previous budgets, calculate the estimated contribution margin per unit for 2013. (Hint: Silk-screened labor and the taxes are both fi xed costs.) (b) Calculate the total estimated fi xed costs for 2013 (including interest and taxes). (c) Compute the break-even point in units and dollars for 2013. 14. (a) Michael is very disappointed that the company did not have an income of $25,000 for its fi rst year of budgeted operations as he had wanted. How many shirts would the company have had to sell in order to have had a profi t of $25,000? (Ignore changes in income tax expense.) (b) Why does the company’s net income differ from its ending cash balance? 15. Do you think it was a good idea to offer Cary Sue a salary plus 10% of sales? Why or why not?