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.

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 September January Difference Cost/unit

Units 8,000 2,000 6,000

Cost $1,914.00 $1,716.00 $198.00 $0.03

Hi-Lo Utilities September January Difference Cost/Unit January Sales January /unit cost January Units Maintenance Cost January

Units 8,000 2000 6,000

Cost $1,400.00 $1,100.00 $300.00 $0.05

12000 16 750 Units Cost/unit Total Variable Costs Units Cost/Unit Total Variable Costs 750 $0.03 $24.75 750 $0.05 $37.50

Utilities Cost January

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 Expected unit sales Unit selling price Budgeted sales revenue X $ 8 000 16 128 000 2 10 000 16 160 000 3 20 000 16 320 000 4 12 000 16 192 000 Year 50 000 16 800 000

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 Accounts Receivable 1/1/06 First quarter ($ 128 000) Second quarter ($ 160 000) Third quarter ($ 320 000) Fourth quarter ($ 192 000) Total collections $ 89 600 $ 150 400 $ 272 000 -089 600 38 400 112 000 48 000 224 000 96 000 134 000 $ 230 400 2 3 4

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 quarters 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 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 8 000 2 500 10 500 0 10 500 10 $105 000 2 10 000 5 000 15 000 2 500 12 500 10 3 20 000 3 000 23 000 5 000 18 000 10 4 12 000 4 500 16 500 3 000 13 500 10 Year 18 000

$ 125 000 $ 180 000 $ 135 000

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 Accounts Payable 1/1/06 First quarter ( $ 105 000) Second quarter ( $ 125 000) Third quarter ($ 180 000) Fourth quarter ($ 135 000) Total payments $ 42 000 $ 113 000 $ 147 000 -042 000 63 000 50 000 75 000 72 000 108 000 54 000 $ 162 000 81 000 2 3 4

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 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 X 8 000 0.12 960 X 12 $ 11 520 2 10 000 0.12 1 200 12 $ 14 400 3 20 000 0.12 2 400 12 $ 28 800 4 12 000 0.12 1 440 12 $ 17 280 Year 50 000 0.12 6 000 12 $ 72 000

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 2

1 Variable expenses Sales commissions (10%) Total variable expenses Fixed expenses Advertising Rent Sales salaries Office salaries Depreciation Property taxes and insurance Total fixed expenses Total selling and administrative expenses 1 300 750 1 800 1 800 75 95 5 820 $ 18 620 12 800 12 800

Year

16 000 16 000

32 000 32 000

19 200 19 200

80 000 80 000

1 300 750 1 800 1 800 75 95 5 820 $ 21 820

1 300 750 1 800 1 800 75 95 5 820 $ 37 820

1 300 750 1 800 1 800 75 95 5 820 $ 25 020

52 000 3 000 7 200 7 200 300 380 23 280 $ 103 280

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 1000 X 0.25 X 3 = 750 1200 X 0.5 X 3 = 1800 1200 X 0.5 X 3 = 1800 1) 2000 10 4 = 50 2) 500 54 = 25 3) 50 + 25 = 75 380 4 = 95

Rent Sales salaries Office salaries Depreciation

Property Taxes and Insurance

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 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 silkscreen hour 2250 4 950 3 000 1 500 560 690 12 950 $ 20 414 960 21.264 2250 4950 3 000 1 500 560 690 12 950 $ 22 280 1 200 18.567 2250 4 950 3 000 1 500 560 690 12 950 $ 31 610 2 400 13.171 2250 4 950 3 000 1 500 560 690 12 950 $ 24 146 1 440 16.768 2250 19 800 12 000 6 000 2240 2760 51 800 $ 98 450 6000 16.408 6 000 264 400 800 $7 464 7 500 330 500 1 000 $ 9 330 15 000 660 1 000 2 000 $ 18 660 9000 396 600 1 200 $ 11 196 37 500 1650 2500 5000 $ 46 650 2 3 4 Year

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
Less:

$ 800 000 670 450

Cost of goods sold Gross profit

129 550
103 280 26 270 1 600 24 670 4 934 $19 763

Less:

Selling and administrative expenses

Income from operations

Less:

Interest expense Income before income taxes

Less:

Income tax expense Net income

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

* Cost Of Goods Sold Material Labor Overheads Cost Of Goods Sold

500 000 72 000 98 450 670 450

* 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 2 3
0 9136 -19874

1
Beginning cash balance

4
7661

Year

Add: Receipts Collections from customers Total available cash

Less: Disbursements $89,600 $89,600 $150,400 $159,536 $272,000 $252,126 $230,400 $238,061

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

$42,000 $11,520 $19,724 $18,545 $8,675 $100,464 ($10,864)

$113,000 $14,400 $21,590 $21,745 $8,675 $179,410 ($19,874)

$147,000 $28,800 $30,920 $37,745

$162,000 $17,280 $23,456 $24,945

$244,465 $7,661

$227,681 $10,380

$20,000 $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 Accounts receivable Sweatshirt Inventory Equipment

Less: Accumulated depreciation

10380

57600
45000 17350 3060 $ 127 270

Total assets

Liabilities and Owners Equity

Accounts payable Note payable Interest payable Taxes payable Total liabilities Michael Woods, Capital

81000 20000 1600 4934 107534 19736

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

Total liabilities and owners 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 Variable Costs Contribution Margin Number of Units Sold CM Per Unit $800,000 $626,650 $173,350 50,000 $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 / Net Income Contribution Margin Ratio Break Even ($) + Fixed Costs / 0 Net Income = Control Margin BE Point Units $153,614 0 0.2166875 $708,920 $153,614 0 $3.47 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 Target Income CM Per Unit Number of Units $153,614 $25,000 $3.47 51.52

+ / =

Why does Michaels 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 6 *Advertising Cost Student Paper Local Paper Total Cost *Rent Sales Production *S & A Salaries Sales Admin. /week 25 75 100 Rent/month 250 750 Fixed/month $600 $600 # hours/week 20 /year 1250 3750 5200 Rent/qtr 750 2250 Fixed/qtr $1,800.00 $1,800.00 # weeks 50 /qtr 312.5 937.5 1300 #Hours 6000

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SWEAT GALORE
ROSELINDAWATI BINTI ZAINAL ABDIN 2010169575

*Graphic Design

Fixed/month 500

fixed/qut 1500

*Depreciation Depreciation Equipment Hand-operated press that applies ink to the shirt Light-exposure table Dryer conveyer belt that makes ink dry on the shirts Computer with graphics software and color printer Total Machinery Initial Price $7,500 $1,350 $2,500 $3,500 $14,850 In Years 5 10 10 4 29 Cost/Year $1,500 $135 $250 $875 $2,760 Cost/Qtr $375 $34 $63 $219 $690

Display furniture Used cash register Total Non-Machinery

$2,000 $500 $2,500

10 5 15

$200 $100 $300

$50 $25 $75

*Total Costs Equipment

$17,350

44

$3,060

$765

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