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	34,000	54,000	27,000	54,000

• Each T-shirt is expected to sell for $18.
• The purchasing manager buys the T-shirts for $7 each.
• The company needs to have enough T-shirts on hand at the end of each quarter to fill 28 percent of the next quarter’s sales demand.
• Selling and administrative expenses are budgeted at $68,000 per quarter plus 14 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

a)	Budgeted Sales Revenue
		Quarter1	Quarter2	Quarter3	Quarter4
	Revenue
	Units	34000	54000	27000	54000
	Sales price per unit	18	18	18	18
	Total Sales Revenue	612000	972000	486000	972000
b)	Cost of merchandise purchased
		Quarter1	Quarter2	Quarter3	Quarter4
	Opening Inventory	0	15120	7560	15120
	Purchases
	For Current quarter	34000	38880	19440	38880
	For Next Quarter	15120	7560	15120	0
	Total Purchases (In Units)	49120	46440	34560	38880
	Purchase price per unit	7	7	7	7
	Cost of merchandise purchased	343840	325080	241920	272160
c)	Cost of goods sold
	Opening Inventory		105840	52920	105840
	Cost of merchandise purchased	343840	325080	241920	272160
	Less: Closing Inventory	105840	52920	105840	0
	Cost of goods sold	238000	378000	189000	378000
d)	Selling and administrative expenses
	Revenue	612000	972000	486000	972000
	Fixed Expenses	68000	68000	68000	68000
	Add: Varaible expense 14% of revenue	85680	136080	68040	136080
	Selling and administrative expenses	153680	204080	136040	204080
e)	Budgeted Income Statement
		Quarter1	Quarter2	Quarter3	Quarter4
1)	Budgeted Sales Revenue	612000	972000	486000	972000
	Cost Of goods sold
	Opening Inventory		105840	52920	105840
2)	Cost of merchandise purchased	343840	325080	241920	272160
	Less: Closing Stock	105840	52920	105840	0
3)	Cost of goods sold	238000	378000	189000	378000
4)	Less: Selling and administrative expenses	153680	204080	136040	204080
5)	Budgeted Operating income	220320	389920	160960	389920