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SWEAT GALORE

ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

ANSWERS

1. Do you think it was important for Michael to stipulate that he wanted a business that he
would enjoy, that would give back to the community, that would grow and be more
successful every year, and that would generate a net income of $25,000 annually? Why
or why not?

It's always important to set goals to measure the success of any business. However, the
first three goals are more of a mission statement while the fourth is an objective for the
company. The problem is there no plan and one objective. What is he going to do if the
company doesn't net the $25,000? Or what if it nets the $25,000 but there is not
enough cash to sustain the business? There need to be more objectives to make
allowances for these types of situations. There needs to be a plan of action where goals
change from period to period. Otherwise, the business cannot succeed.

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

2. If Michael has sales of $12,000 during January of his first year of business, determine the
amount of variable and fixed costs associated with utilities and maintenance using the
high-low method for each.

Hi-Lo Maintenance Units Cost


September 8,000 $1,914.00
January 2,000 $1,716.00
Difference 6,000 $198.00
Cost/unit $0.03

Hi-Lo Utilities Units Cost


September 8,000 $1,400.00
January 2000 $1,100.00
Difference 6,000 $300.00
Cost/Unit $0.05

January Sales 12000


January /unit cost 16
January Units 750

Maintenance Cost January Units 750


Cost/unit $0.03
Total Variable
Costs $24.75

Utilities Cost January Units 750


Cost/Unit $0.05
Total Variable
Costs $37.50

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

3. Using the format below, prepare a Sales Budget for the year ending 2008.

SWEATS GALORE
Sales Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year

Expected unit sales 8 000 10 000 20 000 12 000 50 000

Unit selling price X 16 16 16 16 16

Budgeted sales
$ 128 000 160 000 320 000 192 000 800 000
revenue

4. Prepare a Schedule of Expected Collections from Customers

SWEATS GALORE
Schedule of Expected Collections from Customers
For the Year Ending December 31, 2008

Quarter
1 2 3 4

Accounts Receivable 1/1/06 -0-

First quarter ($ 128 000) 89 600 38 400

Second quarter ($ 160 000) 112 000 48 000

Third quarter ($ 320 000) 224 000 96 000

Fourth quarter ($ 192 000) 134 000

Total collections $ 89 600 $ 150 400 $ 272 000 $ 230 400

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

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 percent of the
next quarter’s sales.

Prepare a Purchases Budget for shirts using the format provided.

SWEATS GALORE
Shirt Purchases Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year

Shirts to be silk-screened 8 000 10 000 20 000 12 000 18 000

Plus desired ending inventory 2 500 5 000 3 000 4 500

Total shirts required 10 500 15 000 23 000 16 500

Less beginning inventory 0 2 500 5 000 3 000

Total shirts needed 10 500 12 500 18 000 13 500

Cost per shirt 10 10 10 10

Total cost of shirt purchases $105 000 $ 125 000 $ 180 000 $ 135 000

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

6. Prepare a Schedule of Expected Payments for Purchases

SWEATS GALORE
Schedule of Expected Payments for Purchases
For the Year Ending December 31, 2008

Quarter
1 2 3 4

Accounts Payable 1/1/06 -0-

First quarter ( $ 105 000) 42 000 63 000

Second quarter ( $ 125 000) 50 000 75 000

Third quarter ($ 180 000) 72 000 108 000

Fourth quarter ($ 135 000) 54 000 81 000

Total payments $ 42 000 $ 113 000 $ 147 000 $ 162 000

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

7. Prepare a Silk-screen Labor Budget.

SWEATS GALORE
Silk-screen Labor Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year

Units to be produced 8 000 10 000 20 000 12 000 50 000

Silk-screen labor hours per


X 0.12 0.12 0.12 0.12 0.12
unit
Total required silk-screen
960 1 200 2 400 1 440 6 000
labor hours
Silk-screen labor cost per
X 12 12 12 12 12
hour

Total silk-screen labor cost $ 11 520 $ 14 400 $ 28 800 $ 17 280 $ 72 000

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

8. Prepare a Selling and Administrative Expense Budget for Sweats Galore for the year
ending December 31, 2008.

SWEATS GALORE
Selling and Administrative Expense Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year

Variable expenses

Sales commissions (10%) 12 800 16 000 32 000 19 200 80 000

Total variable expenses 12 800 16 000 32 000 19 200 80 000

Fixed expenses

Advertising 1 300 1 300 1 300 1 300 52 000

Rent 750 750 750 750 3 000

Sales salaries 1 800 1 800 1 800 1 800 7 200

Office salaries 1 800 1 800 1 800 1 800 7 200

Depreciation 75 75 75 75 300

Property taxes and insurance 95 95 95 95 380

Total fixed expenses 5 820 5 820 5 820 5 820 23 280

Total selling and administrative


$ 18 620 $ 21 820 $ 37 820 $ 25 020 $ 103 280
expenses

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

 1 year = 52 weeks
 1 Quarter = 52 / 4
= 13 weeks
Fixed Expenses
Advertising 1) 25+ 75 = 100
2) 100 X 52 = 5200
3) 5 200 ÷ 4 = 1300

Rent 1000 X 0.25 X 3 = 750

Sales salaries 1200 X 0.5 X 3 = 1800

Office salaries 1200 X 0.5 X 3 = 1800

Depreciation 1) 2000 ÷ 10÷ 4 = 50


2) 500÷ 5÷4 = 25
3) 50 + 25 = 75

Property Taxes and Insurance 380÷ 4 = 95

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

9. Prepare a Silk-screen Overhead Budget for Sweats Galore for the year ending December
31, 2008.

Sweats Galore
Silk-screen Overhead Expense Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year
Variable expenses

Ink 6 000 7 500 15 000 9000 37 500

Maintenance 264 330 660 396 1650

Utilities 400 500 1 000 600 2500

Graphics design 800 1 000 2 000 1 200 5000

Total variable expenses $7 464 $ 9 330 $ 18 660 $ 11 196 $ 46 650

Fixed expenses

Rent 2250 2250 2250 2250 2250

Maintenance 4 950 4950 4 950 4 950 19 800

Utilities 3 000 3 000 3 000 3 000 12 000

Graphics design 1 500 1 500 1 500 1 500 6 000


Property taxes and
560 560 560 560 2240
insurance
Depreciation 690 690 690 690 2760

Total fixed expenses 12 950 12 950 12 950 12 950 51 800


Total silk-screen
$ 20 414 $ 22 280 $ 31 610 $ 24 146 $ 98 450
overhead
Direct silk-screen hours 960 1 200 2 400 1 440 6000

Overhead rate per silk-


21.264 18.567 13.171 16.768 16.408
screen hour

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

10. Using the information found in the case and the previous budgets, prepare a Budgeted
Income Statement for Sweats Galore for the year ended December 31, 2008.

SWEATS GALORE
Budgeted Income Statement

For the Year Ending December 31, 2008

Sales $ 800 000

Less: Cost of goods sold 670 450

Gross profit 129 550

Less: Selling and administrative expenses 103 280

Income from operations 26 270

Less: Interest expense 1 600

Income before income taxes 24 670

Less: Income tax expense 4 934

Net income $19 763

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

* Cost Of Goods Sold


Material 500 000
Labor 72 000
Overheads 98 450
Cost Of Goods Sold 670 450

* Interest expense 8% X 20 000 = 1600

*Income Tax expense 20% X 24 670 = 4934

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

11. Using the information found in the case and the previous budgets, prepare a Cash Budget
for Sweats Galore for the year ended December 31, 2006.

Sweats Galore
Cash Budget
For the Year Ending December 31, 2008

Quarter
1 2 3 4 Year
Beginning cash balance 0 9136 -19874 7661

Add: Receipts

Collections from customers $89,600 $150,400 $272,000 $230,400

Total available cash $89,600 $159,536 $252,126 $238,061

Less: Disbursements

Payments for shirt purchases $42,000 $113,000 $147,000 $162,000

Silk-screen labor $11,520 $14,400 $28,800 $17,280

Silk-screen overhead $19,724 $21,590 $30,920 $23,456

Selling and administrative


$18,545 $21,745 $37,745 $24,945
expenses

Payment for equipment purchase $8,675 $8,675

Total disbursements $100,464 $179,410 $244,465 $227,681

Excess (deficiency) of available


($10,864) ($19,874) $7,661 $10,380
cash over disbursements

Financing

Borrowings $20,000

Ending cash balance $9,136 ($19,874) $7,661 $10,380

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

12. Using the information contained in the case and the previous budgets, prepare a
Budgeted Balance Sheet for Sweats Galore for the year ended December 31, 2008.

Sweats Galore
Budgeted Balance Sheet

31-Dec-08

Assets

Cash 10380

Accounts receivable 57600

Sweatshirt Inventory 45000

Equipment 17350

Less: Accumulated depreciation 3060

Total assets $ 127 270

Liabilities and Owner’s Equity

Accounts payable 81000

Note payable 20000

Interest payable 1600

Taxes payable 4934

Total liabilities 107534

Michael Woods, Capital 19736

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

Total liabilities and owner’s equity $ 127 270

13. Using the information contained in the case and the previous budgets, calculate the
estimated contribution margin per unit for 2008.

Contribution Margin

- Sales Revenue $800,000


= Variable Costs $626,650
/ Contribution Margin $173,350
= Number of Units Sold 50,000

CM Per Unit $3.47

Calculate the total estimated fixed costs for 2008 (including interest and taxes).

Total Fixed Costs $153,614

Compute the break-even point in units and dollars for 2008.

Break Even

+ Fixed Costs $153,614


/ Net Income 0
Contribution Margin
Ratio 0.2166875

Break Even ($) $708,920

+ Fixed Costs $153,614


/ 0 Net Income 0
= Control Margin $3.47

BE Point Units 44,307

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

14. Michael is very disappointed that he did not have an income of $25,000 for his first year
of budgeted operations as he had wanted. How many shirts would Michael have to sell
in order to have a profit of $25,000?

Amount of shirts needed to Net $25000 goal.

Fixed Cost $153,614


+ Target Income $25,000
/ CM Per Unit $3.47
=
Number of Units 51.52

Why does Michael’s net income differ from his ending cash balance?

The cash is not the same as the net income because the net income doesn't take into
account any payments made to loans or for equipment bought on credit but does take
into account depreciation. Depreciation is not counted as part of the cash flow because
it is a capital expenditure but is accounted for in the net income.

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

15. Do you think it was a good idea to offer Cary Sue a salary plus 10 percent of sales? Why
or why not?

We believe it's not a good idea to pay Sue a salary plus 10% commission. She is making
$94,400 a year. The net income for the business is less than $20,000 a year. If Michael
wants to hit his $25,000 annually, he should pay Sue less of a commission or not pay a
salary for when she conducts sales or both. Plus, the other employees much harder
than Sue and get paid a much smaller wage than her which can cause resentment
among the co-workers.

ADDITIONAL
CALCULATIONS
Additional Calculations
*Silk Screen Labor Hours # of workers # hours/week # weeks #Hours
6 20 50 6000

*Advertising Cost /week /year /qtr


Student Paper 25 1250 312.5
Local Paper 75 3750 937.5
Total Cost 100 5200 1300

*Rent Rent/month Rent/qtr


Sales 250 750
Production 750 2250

*S & A Salaries Fixed/month Fixed/qtr


Sales $600 $1,800.00
Admin. $600 $1,800.00

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

*Graphic Design Fixed/month fixed/qut


500 1500

*Depreciation
Depreciation

Equipment Initial Price In Years Cost/Year Cost/Qtr

Hand-operated press that


applies ink to the shirt $7,500 5 $1,500 $375

Light-exposure table $1,350 10 $135 $34

Dryer conveyer belt that


makes ink dry on the shirts $2,500 10 $250 $63

Computer with graphics


software and color printer $3,500 4 $875 $219

Total Machinery $14,850 29 $2,760 $690

Display furniture $2,000 10 $200 $50

Used cash register $500 5 $100 $25

Total Non-Machinery $2,500 15 $300 $75

*Total Costs Equipment $17,350 44 $3,060 $765

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