case-budget by uc86


									wroceTs lN TrnaE
After graduating with a degree in liberal arts from Califomia State University Fullerton in Fullerton, CA,
Harrison G. Wells, III realized that he wanted to remain in Fullerton, CA. Realizing his degree was sort of
useless after a number of unsuccessful attempts at getting a job in his undefined discipline, Harrison
decided to go into business for himself. In thinking about his business venture, he determined that he had
five criteria for the new business:

1. He wanted to do something that he would enjoy.
2. He wanted a business that would give back to the community.
3. He wanted a business that would grow and be more successful every year.
4. Realizing that he was going to have to work very hard, Harrison wanted a business that would generate
   a minimum net income of $25,000 annually.
5. He could obtain financing from a local bank.

While reflecting on the criteria he had outlined, Harrison, who had been president of his fraternity and
served as an officer in several other student organizations, realized that with his grandfather's third
generation time machine about ready for the production line there would be an opportunity to be a
component supplier. After speaking with his father HG Wells II, CEO of Time Travel Co. he decided there
was an opportunity to supply a widget which required a special coating process.

Harrison had worked as a part-time employee at Time Travel while he was in high school and had
envisioned assisting the company in some way in the future. He realized that as component supplier to his
father's company he had the potential to meet all five of his criteria. Harrison set up an appointment with
Rip Van Winkle, the production manager for Time Travel, to obtain information useful in getting his shop
started. Because Rip liked Harrison (and knew he was the boss' son) and was intrigued by his
entrepreneurial spirit, he answered many of Harrison's questions.

ln addition, Rip provided information conceming the type of equipment Harrison would need for his
business and its average useful life. Rip knew of a current supplier who was retiring and would like to sell
his equipment. Harrison can purchase the equipment at the beginning of 2013, and the owner is willing
togivehim termsof50% due uponpurchase and 50Yo due the quarterfollowingthepurchase.
Harrison decided to purchase the following equipment as of January 1,2013.

                                                                  Amt      T   ife
          Special Coating Applicator                             $7,s00    5 yrs.
          vz Invertor                                            I,J)U    IU yrs.
          Dust Keducer                                           z,)vv    ru yrs.
          \-ray macnlne                                          J,)UU    4 yrs.
          maglng analyzef                                        z,Oau    lu yrs.
          \ccountlng sottware                                      500    )    yrs.

Harrison decided to use the raw materials supplier recommended by Rip. He leamed that the raw materials
of good-quality sold in quantities of 144 units that would require the special coating would cost $1,440.
Rip has encouraged Hanison to ask the supplier for terms of 40%io of a quarter's purchases to be paid in the
quarter of purchase, with the remaining 600/o of the quarter's purchases to be paid in the quarter following
the purchase.

Harrison also learned from talking with Rip that the coating material in the coating process costs
approximately $0.75 per unit. Knowing that the coating process is somewhat labor-intensive, Harrison
plans to hire six college students to help with the process. Each one will work an average of 20 hours per
week for 50 weeks during the year. Harrison estimates total annual wages the workers to be $72,000.

                                                       1of   I
T                                                     I
In addition, Harrison will need a person in sales who ideally can also, bill customers' and operate the
accounting system. Sally Sue, who went back to school to get her accounting degree since her husband -
Billy Bob didn't give up duck hunting, is an accomplished    time traveler and successful independent sales
r"p ior Time Travel has approached Harrison about representing his key time travel component' Sally Sue
knows all of the other companies in the time travel industry. In addition, with her accounting degree she
could handle all of the accounting needs for the first year of business. Harrison is willing to pay Sally Sue
$1,200 per month plus a commission of 10olo of sales. Harrison estimates she will spend 50% of the
workday focusing on sales, and the remaining 50% on accounting duties.

Harrison realizes that he will have difficulty finding a coating supervisor to complete the final step in the
coating. Rip recently hired someone in a similar position at arale of $500 per month plus $0.10 for each
widgeicoated. Hanison believes he can find a university engineering student to work for the same rate Rip
is paying.

Harrison was fortunate to find a commercial building for rent near the university and the downtown area.
The landlord requires a one-year lease. Although the monthly rent of $1,000 is more than Harrison had
anticipated paying, the building is nice, has adequate parking, and there is room for expansion. Harrison
anticipates thatT5o/o of the building will be used in the coating process and
25o/o   will be used for sales.

Harrison found that a3" X3" ad would cost $25 per week in the online U.S. industry trade newsletter,
Time Machine Suppliers. Harrison also plans to run a weekly ad in the intemational edition that will cost
him $75 per week.

Harrison wants to sell a large number of widgets at a reasonable price. He estimates the selling price of
each widget to be $16. Rip has suggested that he should ask customers to pay for 70Yo of their
purchases in the quarter purchased and pay the additional3}% in the quarter following the purchases'

After talking with the insurance agent and the property valuation administrator in his municipality, Harrison
estimates that the property taxes and insurance on the machinery will cost 52,240 annually; property tax
and insurance on display furniture and accounting software will total $380 annually'

Rip reminded Harrison that maintenance of the machines is required for the coating process. In addition,
Hanison realizes that he must consider the cost of utilities. The building Hanison wants to rent is roughly
the same size as the building occupied by the competitor who retired. ln addition, the competitor sold
approximately the same number of a similar product Harrison plans to sell. Therefore, Harrison is confident
that the maintenance and utility costs for his shop will be comparable to the maintenance and utility
costs for the retired competitor, which are as follows within the relevant range of zero to 8,000 Widgets.
                                              Units Sold      Maintenance Costs   Utility Costs
                                  Ianuarv       2.000              $   716           $   100
                                  February      2.1   l0               720               158
                                  March         2.630                  740               171
                                  April         3.150                  744               t gtt

                                  May           5.000                  754               268
                                  June          5,300                  til8              "274
                                  Julv          3,92tJ                 .825              .205
                                  Ausust        2,080                  780                 t7
                                  September     8.000                  9t4               ,400
                                  October       6.810                   860              ,362
                                  November      6.000                   855              ,347
                                  December      3,000                  ,749              t93

                                                 -                                                 -
Harrison estimates the number of widgets to be sold in the first five quarters, beginning January 2013, to

                                           First ouarter vear    1         8.OO(
                                           Second quarter. vear           10.00(
                                           Third ouarter- vear 1          20.00(
                                           Fourth ouarter- vear      1    l2-oo(
                                           First quarter. year 2          18.00(

Seeing how determined his son was to become an entrepreneur, Harrison's father offered to co-sign a note
for an amount up to $20,000 to help Harrison open his business, Widgets in Time. However, when Harrison
and his father approached the loan officer at First Guarantee Bank, the loan offlrcer asked Harrison to
produce the following budgets for 2013.

             Sales   budset
             Schedule of expected collections from customers
             Materials ourchases budeet
             Schedule of exnected pavments for purchases
             Coatins labor budeet
             Budseted income statement
             Selline and administrative expenses budget
             Coating overhead expenses budget
             Cash budeet
             Budeeted balance sheet
The loan officer advised Harrison that the interest rate on a 12-month loan would be 8%. Harrison expects
the loan to be taken out as ofJanuary 1,2013.

Harrison has estimated that his income tax rate will be 2Ao/o.He expects to pay the total tax due when his
returns are filed   in20l4.


(Show your work we must know how you got your numbers or otherwise no credit)

(Highly recommend that you prepare your answers using Excel)

1.   Do you think it was important for Harrison to stipulate his four criteria for the business,
     including the goal of generating a net income of at least $25,000 annually? Why or why not? (}.{ot
     more than a paragraph and does not need to be in a formal memo)

2. If Hanison has sales of 512,000 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.

3. Using the format below,   prepare a sales budget for the year ending 2013.

                                      Widgets In
                                     Sales Budget
                                    For the Year Ended
                                    December 31, 2013

                                              L           2     3   4   Year
               Expected unit sales
               Unit selling price
               Budgeted sales revenue $

4.   Prepare a schedule of expected collections from customers.

                                    Widgets In Time
                               Schedule of Expected
                             Collections from Customers
                                 For the Year Ending
                                 December 31, 2Ol3
                  Accounts receivable ll I   I 13   -
                   First Qtr
                 Second Qlr
                 Third Qtr
                 Fourth Qtr

5. Harrison learned from talking with Rip that the supplier of the Widget material was so focused on
making quality that many times the widget material was not available for several days. Rip
encouraged Harrison to maintain an ending inventory of widgets (uncoated) equal to 25Vo of the next
quarter's sales. Prepare a widget purchases budget for the completed (coated) widgets using the format

                                          Widgets In Time
                                      Widget Purchases Budget
                                         For the Year Ended
                                          December 3l-2013
             Widgets to be coated
             Plus: Desired ending inventory
             Total widgets required
             Less: Beginning inventory
             Total widgets needed
             Cost per widget
             Total cost of widget purchases

6. Prepare a schedule of expected payments for purchases.

                                   Widgets In Time
                               Schedule of Expected
                              Payments for Purchases
                                For the Year Ended
                                December 3l,2Ol3

                Accounts pay able    lll ll3
                0- First Qtr
                Second @
                Third Qf
                Fourth Qtr

         7. Prepare a coating labor budget.

                                                       Widgets In Time
                                                   Coating Labor Budget
                                                      For Year Ended
                                                    December 3I' 2Al3
              Units to be Produced
              Coating labor hours Per unit
              Total required labor hours
              Labor   cost Per    hour
              Total coating labor cost

         8.   Prepare a selling and administrative expenses budget for Widgets In Time for the
              year ending December 3l' 2013.

                                   Se   uin g .                     Xlo"o."*     Bud get
                                                  "u ^.,I'ir*"::"t;;tEnded
                                                      For thc Year
                                                      December 3l' 2013
              Variable expenses:
                 Sales commissions
              Total variable expenses
              Fixed exPenses:
                Sales salaries
                Office salaries
                ProPertY taxes and insurance
              Total fixed expenses
              Total selling and
                 administrative expeilses

         9.   prepare a coating overhead expenses budget for the year ending December 31, 2013

                                                        Widgets In Time
                                         Coatings Overhead Expenses Budget
                                                 For the Year Ended
                                                 Decemtrer 31, 2Ol3
                                                                     I       2       3      4   Year
              Total variable expenses
              Fixed exPenses:

Labor-----             Fi#"*      taxes and insurance
               Total fixed expenses
               Total coating overhead
               Direct coating hours
               Overhead rate Per coating hour
10. Using the information found in the case and the previous budgets, prepare a
    budgeted income statement for Widgets In Time for the year ended December 31,

                                        Widgets In Time
                                 Budgeted Income Statement
                            For the Year Ended December 31, 2OL3
        Cost of goods sold
        Gross      profit
        Selling and administrative expenses
        Income from operations
        Interest expense
        Income before income taxes
        Income tax expense
        Net income

11. Using the information found in the case and the previous budgets, prepare a   cash
    budget for tho year ended December3l, 2013.
                                       Widgets In Time
                                         Cash Budget
                                     For the Year Ended
                                     December 31, 2013
            Beginningcash balance
            Add: Receipts
            Collections from customers
            Total available cash
            Less: Disbursements
            Payments for purchases
            Coating labor
            Coating overhead
            Selling and administrative expenses
            Payment for equipment purchase
            Total disbursements
            Excess (dehciency) of available cash
            over disbursements
            Ending cash balance

12. Using the information contained in the case and the previous budgets, prepare a
    budgeted balance sheet for Widgets InTime for the year ended December 31, 2013.
                                       Widgets In Time
                                  Budgeted Balance Sheet
                                    December 31, 2013
            Accounts receivable
            Widget inventory
            Less: Accumulated depreciation
            Total assets

                                        Liabilities and Owner's Equity
             Accounts payable
             Notes payable
             Interest payable
             Ta-res payable
                       Total liabilities
              Harrison Wells III, Capital
              Total liabilities and owner'sequity

                                                      7   olI
13.    Contribution Margin & Breakeven

       (a) Using the information contained in the case and the previous budgets, calculate the
       estimated contribution margin per unit for 2013. (Hint: coating labor and the taxes are both
       fixed costs.)
       (b) Calculate the total estimated fixed costs for 2013 (including interest and taxes).
       (c) Compute the break-even point in units and dollars for 2013.
14. (a) Harrison 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 widgets would he have had to sell in order to
have had a profit of $25,000? (Ignore changes in income tax expense.)

(b) Why does the net income differ from the ending cash balance?

15. Doyou thinkitwas agood idea      to offer SallySue asalaryplus 10% ofsales?Whyorwhy


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