PA8-6 Preparing Operating Budgets for a Merchandising Firm [LO 8-5, 8-3a, f, g,

Question

PA8-6 Preparing Operating Budgets for a Merchandising Firm [LO 8-5, 8-3a, f, g, h) Red Canyon T-shirt Company operates a chain of T-shirt shops in the southwestern United States. The sales manager has provided a sales forecast for the coming year, along with the following information Quarter 1 Quarter 2 Quarter 3 Quarter 4 49,000 78,000 39,000 78,000 Budgeted Unit Sales Each T-shirt is expected to sell for $24 The purchasing manager buys the T-shirts for $10 each. The company needs to have enough T-shirts on hand at the end of each quarter to fill 34 percent of the next quarter's sales demand. Selling and administrative expenses are budgeted at $98,000 per quarter plus 14 percent of total sales revenue. Required 1. Determine budgeted sales revenue for each quarte Quarter 1 Quarter 2Quarter 3 Budgeted Sales Revenue 2. Determine budgeted cost of merchandise purchased for each quarter. Quarter 1 Quarter2 Quarter3 Budgeted Cost of Merchandise Purchased

Explanation / Answer

Solution:

Part 1 – Budgeted Sales Revenue

Quarter 1

Quarter 2

Quarter 3

Budgeted Sales Units

49000

78000

39000

Unit Selling Price

$24

$24

$24

Budgeted Sales Revenue

$1,176,000

$1,872,000

$936,000

Part 2 –

Budgeted Cost of Merchandise Purchased

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Budgeted Unit Sales

49000

78000

39000

78000

Add: Ending Inventory (34% of next quarter sales)

26520

13260

26520

Total Needs

75520

91260

65520

Less: Beginning Inventory (Ending inventory of last quarter)

16660

26520

13260

Total Budgeted Merchandise Purchases in Units

58860

64740

52260

Unit Cost

$10

$10

$10

Budgeted Cost of Merchandise Purchases

$588,600

$647,400

$522,600

Part 3 –

Quarter 1

Quarter 2

Quarter 3

Budgeted Sales Units

49000

78000

39000

Unit Purchase Cost

$10

$10

$10

Budgeted Cost of Goods Sold

$490,000

$780,000

$390,000

Part 4 –

Budgeted Selling and Administrative Expenses

Quarter 1

Quarter 2

Quarter 3

Selling and Administrative Expenses

$98,000

$98,000

$98,000

Variable Selling and administrative expense (14% of Total Sales)

$164,640

$262,080

$131,040

Total Budgeted Selling and Administrative Expenses

$262,640

$360,080

$229,040

Part 5 – Budgeted Income Statement

Budgeted Income Statement

Quarter 1

Quarter 2

Quarter 3

Budgeted Sales Revenue

$1,176,000

$1,872,000

$936,000

Cost of Goods Sold

$490,000

$780,000

$390,000

Gross Margin (Sales - COGS)

$686,000

$1,092,000

$546,000

Budgeted Selling and Administrative Expenses

$262,640

$360,080

$229,040

Budgeted Operating Income

$423,360

$731,920

$316,960

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Quarter 1

Quarter 2

Quarter 3

Budgeted Sales Units

49000

78000

39000

Unit Selling Price

$24

$24

$24

Budgeted Sales Revenue

$1,176,000

$1,872,000

$936,000

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