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
Budgeted Unit Sales	39,000	59,000	29,500	59,000

• Each T-shirt is expected to sell for $14.
• The purchasing manager buys the T-shirts for $6 each.
• The company needs to have enough T-shirts on hand at the end of each quarter to fill 24 percent of the next quarter’s sales demand.
• Selling and administrative expenses are budgeted at $78,000 per quarter plus 16 percent of total sales revenue.

Required:
1. Determine budgeted sales revenue for each quarter.



2. Determine budgeted cost of merchandise purchased for each quarter.



3. Determine budgeted cost of good sold for each quarter.



4. Determine selling and administrative expenses for each quarter.



5. Complete the budgeted income statement for each quarter.

Answer 1

Ans1	Red Canyon T-shlrt Company
	Sales Budget
	Particulars	Qrtr 1	Qrtr 2	Qrtr 3	Qrtr 4
	Budgeted Unit sales (a)	39,000	59,000	29,500	59,000
	Selling Price per unit (b)	$                  14	$                  14	$                  14	$                14
	Budgeted Sales revenue (a x b)	$        546,000	$        826,000	$        413,000	$     826,000
Ans2	Red Canyon T-shlrt Company
	Cost of merchandise purchased Budget
	Particulars	Qrtr 1	Qrtr 2	Qrtr 3	Qrtr 4
	Budgeted Unit sales	39,000	59,000	29,500	59,000
	Add: closing inventory at 24% of next qrtr sales	14,160	7,080	14,160
	Total required units	53,160	66,080	43,660
	Less: opening inventory	9,360	14,160	7,080
	Purchase units (c )	43,800	51,920	36,580
	Purchase cost per unit (d)	$                     6	$                     6	$                     6
	Budgeted cost of merchandise purchase(c xd)	$        262,800	$        311,520	$        219,480
	14160 = 59000 x 24%
Ans3	Red Canyon T-shlrt Company
	Budgeted Cost of Goods sold
	Particulars	Qrtr 1	Qrtr 2	Qrtr 3	Qrtr 4
	Budgeted Unit sales (e )	39,000	59,000	29,500
	Purchase cost per unit (f)	$                     6	$                     6	$                     6
	Budgeted Cost of Goods sold (e x f)	$        234,000	$        354,000	$        177,000
Ans4	Red Canyon T-shlrt Company
	Budgeted selling and administrative expense
	Particulars	Qrtr 1	Qrtr 2	Qrtr 3	Qrtr 4
	Budgeted Sales revenue	$        546,000	$        826,000	$        413,000
	Variable S&A expense at 16% of revenue (1)	87,360	132,160	66,080
	Fixed S&A expense (2)	78,000	78,000	78,000
	Budgeted selling and administrative expense(1+2)	165,360	210,160	144,080
	87360 = 546000 x 16%
Ans5	Red Canyon T-shlrt Company
	Budgeted income statement
	Particulars	Qrtr 1	Qrtr 2	Qrtr 3	Qrtr 4
1	Budgeted Sales revenue	$        546,000	$        826,000	$        413,000
2	Less: cost of goods sold	234000	354000	177000
3=1-2	Gross Margin earned	$        312,000	$        472,000	$        236,000
4	Less: budgeted selling and administrative exp	165,360	210,160	144,080
5=3-4	Budgeted net operating income	146,640	261,840	91,920
	Note: Qrtr 4 not calculated since information is given for only 3