Management Decision Making

 Management Decision Making

 Management Decision Making

Instructions/Descriptions

Jayne reminded Michael that maintenance of the machines is required for the silk-screen process. In addition, Michael realizes that he must consider the cost of utilities. The building Michael wants to rent is roughly the same size as the building occupied by Shirts and More.

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In addition, Shirts and More sells ap- proximately the same number of shirts Michael plans to sell in his store. There- fore, Michael is confident that the maintenance and utility costs for his shop will be comparable to the maintenance and utility costs for Shirts and More, which are as follows within the relevant range of zero to 8,000 shirts.[Order Now]

January February March April
May
June
July August September October November December

$1,716 1,720 1,740 1,740 1,758 1,818 1,825 1,780 1,914 1,860 1,855

Shirts Sold

2,000
2,110
2,630
3,150
5,000
5,300
3,920
2,080
8,000
6,810
6,000
3,000 1,749

Maintenance

Costs

Utility Costs

$1,100 1,158 1,171 1,198 1,268 1,274 1,205 1,117 1,400 1,362 1,347 1,193

Michael estimates the number of shirts to be sold in the first five quarters, beginning January 2013, to be:

First quarter, year 1 Second quarter, year I Third quarter, year 1 Fourth quarter, year 1 First quarter, year 2

8,000 10,000 20,000 12,000 18,000

Michael decides to establish his company as a corporation. He will invest $10,000 of his personal savings in the company.

Seeing how determined his son was to become an entrepreneur, Michael’s father offered to co-sign a note for an amount up to $20,000 to help Michael open his sweatshirt shop, Sweats Galore, Inc. However, when Michael and his father approached the loan officer at First Guarantee Bank, the loan officer asked Michael to produce the following budgets for 2013.

Sales budget
Schedule of expected collections from customers Shirt purchases budget
Schedule of expected payments for purchases Silk-screen labor budget
Selling and administrative expenses budget Silk-screen overhead expenses budget
Budgeted income statement
Cash budget
Budgeted balance sheet

The loan officer advised Michael that the interest rate on a 12-month loan would be 8%. Michael expects the loan to be taken out as of January I, 2013.

Michael has estimated that his income tax rate will be 20%. He expects to pay the total tax due when his returns are filed in 2014.

Instructions

Answer the following questions.
1.Do you think it was important for Michael to stipulate his four criteria for the business

(sec page CA-20), including the goal of generating a net income of at least$25,000 annually? Why or why not?

2.

3.

4.

If the company has sales of $12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with utilities and maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.)

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 34Year

Expected unit sales Unit selling price Budgeted sales revenue

Prepare a schedule of expected collections from customers.

Sweats Galore, Inc.
Schedule of Expected Collections from Customers For the Year Ending December31, 2013

Quarter 1234

Accounts receivable 1/1/13 -0- First quarter
Second quarter
Third quarter

Fourth quarter Total collections

Michael learned from talking with Jayne that the supplier is so focused on making quality sweatshirts that many times the shirts arc 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 tobe silk-screened Plus: Desired ending inventory Total shirts required
Less: Beginning inventory Total shirts needed
Cost per shirt
Total cost of shirt purchases

Prepare a schedule of expected payments for purchases.

Sweats Galore, Inc.
Schedule of Expected Payments for Purchases For the Year Ended December 31, 2013

Quarter1234

Accounts payable 1/1/13-0-First quarter
Second quarter
Third quarter

Fourth quarter Total payments

5.

6.

case6Cases for Management Decision-Making

.s.pSWEATSA.•4GALORE

CA-23

CA-24SWEATS GALORE

case6Cases for Management Decision-Making

7.

Prepare a silk-screen labor budget.

8.

Prepare a selling and administrative expenses budget for Sweats Galore, Inc. for the year ending December 31, 2013.

9.

Prepare a silk-screen overhead expenses budget for Sweats Galore, Inc. for the year ending December 31, 2013.

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

Variable expenses: Sales commissions

Total variable expenses Fixed expenses:

Advertising
Rent
Sales salaries
Office salaries
Depreciation
Property taxes and insurance

Total fixed expenses Total selling and

administrative expenses

Variable expenses: Ink

Maintenance Utilities Graphics design

Total variable expenses Fixed expenses:

Rent
Maintenance
Utilities
Graphics design
Property taxes and insurance Depreciation

Total fixed expenses
Total silk-screen overhead
Direct silk-screen hours
Overhead rate per silk-screen hour

Sweats Galore, Inc. Silk-Screen Labor Budget
For the Year Ended December 31, 2013

Sweats Galore, Inc.
Selling and Administrative Expenses Budget For the Year Ended December 31, 2013

Sweats Galore, Inc. Silk-Screen Overhead Expenses Budget For the Year Ended December 31, 2013

Quarter
1 2 3 4 Year

Quarter
1 2 3 4 Year

Quarter
1 2 3 4 Year

Sales
Cost of goods sold
Gross profit
Selling and administrative expenses Income from operations
Interest expense
Income before income taxes Income tax expense
Net income

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 (deficiency) of available cash over disbursements

Financing

Borrowings
Ending cash balance

case6Cases for Management Decision-Making

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

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 EndedDecember31, 2013

 Management Decision Making

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