The Business Situation After graduating with a degree in business from Rural College in Campus Town,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Business Situation After graduating with a degree in business from Rural College in Campus Town, USA, Michael Woods realized that he wanted to remain in Campus Town and start building a life for himself. After a few unsuccessful attempts at getting a job in his chosen discipline, Michael decided to start his own business. Thinking about his business venture, Michael determined that he had four criteria that were most important to him: 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 could grow and be more successful every year. 4. Realizing that he was going to have to work very hard, Michael wanted a business that would generate a minimum net income of at least $25,000 annually. A bit more about Michael: he was president of his fraternity and served as an officer in several other student organizations and clubs. During these experiences, he realized that there was no place in Campus Town to have custom shirts made using a silk-screen process. When student organizations wanted shirts for their members to wear or to sell for fundraising on campus, the officers had to make a trip to Big City, over 100 miles away, and visit "Shirts and More." Michael grew up in Big City and worked as a part-time employee at Shirts and More while he was in high school. Back then, he envisioned owning such a shop someday. Michael realized that a shop in Campus Town had the potential to meet all four of his criteria. He set up an appointment with Jayne Stoll, the owner of Shirts and More, to obtain information useful in getting his shop started. Because Jayne liked Michael and was intrigued by his enterprising spirit, she was happy to answer Michael's questions and help him. Jayne provided information concerning the equipment Michael would need for his business and its average useful life. Fortunately for Michael, Jayne knows of a competitor who is retiring at the end of the year and would like to sell his equipment. Michael can purchase the equipment at the beginning of 2022, and the retiring owner is willing to give him terms of 50% due upon purchase and 50% due at the end of the quarter following the purchase. Michael decided to purchase the following equipment as of January 1. Useful Life Cost $7,500 5 yrs. Hand-operated press that applies ink to the shirt 1,350 10 yrs. Light-exposure table 2,500 10 yrs. Dryer conveyor belt that makes ink dry on the shirts Computer with graphics software and color printer 3,500 4 yrs. 2,000 10 yrs. Display furniture Used cash register 500 5 yrs. Michael has decided to use a shirt supplier recommended by Jayne. He learned that a gross¹ of good-quality shirts to be silk-screened would cost $1,440. Jayne has encouraged Michael to ask the shirt supplier for terms of 40% of a quarter's purchases to be paid in the quarter of purchase, with the remaining 60% of the quarter's purchases to be paid in the quarter following the purchase as this was routine in the industry. Michael also learned from talking with Jayne that the ink used in the silk-screen process costs approximately $0.75 per shirt on average. Knowing that the silk-screen process is somewhat labor-intensive, Michael 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. Michael estimates total annual wages for the workers at the state's current minimum wage to be $72,000 in total. In addition, Michael will need one person to take orders, bill customers, and operate the cash register. Cary Smith, who currently works in the Student Development department at Rural College, has approached Michael about a job in sales. Cary knows the officers of all the student organizations on campus. In addition, she is very active in the community and may be able to expand the business' reach. Michael thinks Cary can bring in a lot of business. In addition, she also has the administrative skills needed for the position. Because of her contacts, Michael is willing to pay Cary $1,200 per month plus a commission of 10% of sales. Michael estimates Cary will spend 50% of the workday focusing on marketing and sales, and the remaining 50% will be spent on administrative duties. Michael realizes that may have difficulty finding a person skilled in computer graphics to generate the designs to be printed on the shirts. Jayne recently hired a graphics designer in that position for Shirts and More at a rate of $500 per month plus $0.10 for each shirt printed. Michael believes he can find a top Rural College graphics design student to work for the same rate Jayne is paying her designer. Michael was fortunate to find a commercial building for rent near the college in the downtown area. The landlord requires a one-year lease. Although the monthly rent of $1,000 is more than Michael had anticipated paying, the building is nice, has adequate parking, and there is room for expansion. Michael anticipates that 75% of the building will be used in the silk-screen process and 25% will be used for sales and administration. Michael's friends have encouraged him to advertise weekly in the Rural College student newspaper. Upon inquiring, Michael found that a 3" x 3" ad would cost $25 per week. Michael also plans to run a weekly ad in the local newspaper that will cost him $75 per week. Michael's goal is to sell a large number of quality shirts at a reasonable price. He estimates the selling price of each customized shirt to be $16. Jayne has suggested that he should ask bulk order customers to pay for 70% of their purchases in the quarter purchased and pay the additional 30% in the following quarter. After talking with the insurance agent and the property valuation administrator in his municipality, Michael estimates that the property taxes and insurance on the machinery will cost $2,240 annually; property tax and insurance on display furniture and cash register will total $380 annually. Jayne reminded Michael that maintenance of the machines is required for the silk-screen process. In addition, Michael realizes that he must consider the cost of utilities to run the shop. The building Michael wants to rent is roughly the same size as the building occupied by Shirts and More. In addition, Shirts and More sells approximately the same number of shirts Michael plans to sell in his store. Therefore, Michael is confident that the maintenance and utility costs for his shop will be comparable to the maintenance and utility costs for Shirts and More, which are as follows within the relevant range of zero to 8,000 shirts per month. January February March April May June July August September October November December Shirts Sold 2,000 2,110 2,630 3,150 5,000 5,300 3,920 2,080 8,000 6,810 6,000 3,000 Maintenance Costs $1,716 1,720 1,740 1,740 1,758 1,818 1,825 1,780 1,914 1,860 1,855 1,749 Utility Costs $1,100 1,158 1,171 1,198 1,268 1,274 1,205 1,117 1,400 1,362 1,347 1,193 Michael estimates the number of shirts to be sold in the first five quarters, beginning at the start of the new year, to be: 8,000 First quarter, year 1 Second quarter, year 1 10,000 Third quarter, year 1 20,000 Fourth quarter, year 1 12,000 First quarter, year 2 18,000 Michael decides to establish his company as a regular or C-corporation. He will invest $10,000 of his personal savings in the company. Seeing how determined his son was to become an entrepreneur, Michael's father offered to co-sign a note for an amount up to $20,000 to help Michael open his shirt shop, Screenshot Tops, Inc. However, when Michael and his father approached the loan officer at First Guarantee Bank, the loan officer asked Michael to produce the following budgets for 2022. Sales budget ● Schedule of expected collections from customers for shirt purchases budget Schedule of expected payments for purchases ● • Silk-screen labor budget • Selling and administrative expenses budget ● Silk-screen overhead expenses budget • Budgeted income statement ● Cash budget • Budgeted balance sheet The loan officer advised Michael that the interest rate on a 12-month loan would be 8%. Michael expects the loan to be taken out as of January 1 when he purchases the equipment. Michael has estimated that his income tax rate will be 20%. He expects to pay the total tax due when the returns are filed in 2023. 2. If the company has sales of $12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with a) utilities and b) maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.) c) Compute the expected total maintenance and utility cost at $12,000 Sales volume. 3. Using the format below, prepare a sales budget for the year ending 20xx. Screenshot Tops, Inc. Sales Budget For the Year Ended December 31, 20xx Quarter 3 1 2 4 Year Expected unit sales Unit selling price Budgeted sales revenue 4. Prepare a schedule of expected collections from customers. Screenshot Tops, Inc. Schedule of Collections from Customers For the Year Ended December 31, 20xx Quarter 1 2 Accounts receivable 1/1/xx First quarter Second quarter Third quarter Fourth quarter Total collections -0- 3 4 Year The Business Situation After graduating with a degree in business from Rural College in Campus Town, USA, Michael Woods realized that he wanted to remain in Campus Town and start building a life for himself. After a few unsuccessful attempts at getting a job in his chosen discipline, Michael decided to start his own business. Thinking about his business venture, Michael determined that he had four criteria that were most important to him: 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 could grow and be more successful every year. 4. Realizing that he was going to have to work very hard, Michael wanted a business that would generate a minimum net income of at least $25,000 annually. A bit more about Michael: he was president of his fraternity and served as an officer in several other student organizations and clubs. During these experiences, he realized that there was no place in Campus Town to have custom shirts made using a silk-screen process. When student organizations wanted shirts for their members to wear or to sell for fundraising on campus, the officers had to make a trip to Big City, over 100 miles away, and visit "Shirts and More." Michael grew up in Big City and worked as a part-time employee at Shirts and More while he was in high school. Back then, he envisioned owning such a shop someday. Michael realized that a shop in Campus Town had the potential to meet all four of his criteria. He set up an appointment with Jayne Stoll, the owner of Shirts and More, to obtain information useful in getting his shop started. Because Jayne liked Michael and was intrigued by his enterprising spirit, she was happy to answer Michael's questions and help him. Jayne provided information concerning the equipment Michael would need for his business and its average useful life. Fortunately for Michael, Jayne knows of a competitor who is retiring at the end of the year and would like to sell his equipment. Michael can purchase the equipment at the beginning of 2022, and the retiring owner is willing to give him terms of 50% due upon purchase and 50% due at the end of the quarter following the purchase. Michael decided to purchase the following equipment as of January 1. Useful Life Cost $7,500 5 yrs. Hand-operated press that applies ink to the shirt 1,350 10 yrs. Light-exposure table 2,500 10 yrs. Dryer conveyor belt that makes ink dry on the shirts Computer with graphics software and color printer 3,500 4 yrs. 2,000 10 yrs. Display furniture Used cash register 500 5 yrs. Michael has decided to use a shirt supplier recommended by Jayne. He learned that a gross¹ of good-quality shirts to be silk-screened would cost $1,440. Jayne has encouraged Michael to ask the shirt supplier for terms of 40% of a quarter's purchases to be paid in the quarter of purchase, with the remaining 60% of the quarter's purchases to be paid in the quarter following the purchase as this was routine in the industry. Michael also learned from talking with Jayne that the ink used in the silk-screen process costs approximately $0.75 per shirt on average. Knowing that the silk-screen process is somewhat labor-intensive, Michael 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. Michael estimates total annual wages for the workers at the state's current minimum wage to be $72,000 in total. In addition, Michael will need one person to take orders, bill customers, and operate the cash register. Cary Smith, who currently works in the Student Development department at Rural College, has approached Michael about a job in sales. Cary knows the officers of all the student organizations on campus. In addition, she is very active in the community and may be able to expand the business' reach. Michael thinks Cary can bring in a lot of business. In addition, she also has the administrative skills needed for the position. Because of her contacts, Michael is willing to pay Cary $1,200 per month plus a commission of 10% of sales. Michael estimates Cary will spend 50% of the workday focusing on marketing and sales, and the remaining 50% will be spent on administrative duties. Michael realizes that may have difficulty finding a person skilled in computer graphics to generate the designs to be printed on the shirts. Jayne recently hired a graphics designer in that position for Shirts and More at a rate of $500 per month plus $0.10 for each shirt printed. Michael believes he can find a top Rural College graphics design student to work for the same rate Jayne is paying her designer. Michael was fortunate to find a commercial building for rent near the college in the downtown area. The landlord requires a one-year lease. Although the monthly rent of $1,000 is more than Michael had anticipated paying, the building is nice, has adequate parking, and there is room for expansion. Michael anticipates that 75% of the building will be used in the silk-screen process and 25% will be used for sales and administration. Michael's friends have encouraged him to advertise weekly in the Rural College student newspaper. Upon inquiring, Michael found that a 3" x 3" ad would cost $25 per week. Michael also plans to run a weekly ad in the local newspaper that will cost him $75 per week. Michael's goal is to sell a large number of quality shirts at a reasonable price. He estimates the selling price of each customized shirt to be $16. Jayne has suggested that he should ask bulk order customers to pay for 70% of their purchases in the quarter purchased and pay the additional 30% in the following quarter. After talking with the insurance agent and the property valuation administrator in his municipality, Michael estimates that the property taxes and insurance on the machinery will cost $2,240 annually; property tax and insurance on display furniture and cash register will total $380 annually. Jayne reminded Michael that maintenance of the machines is required for the silk-screen process. In addition, Michael realizes that he must consider the cost of utilities to run the shop. The building Michael wants to rent is roughly the same size as the building occupied by Shirts and More. In addition, Shirts and More sells approximately the same number of shirts Michael plans to sell in his store. Therefore, Michael is confident that the maintenance and utility costs for his shop will be comparable to the maintenance and utility costs for Shirts and More, which are as follows within the relevant range of zero to 8,000 shirts per month. January February March April May June July August September October November December Shirts Sold 2,000 2,110 2,630 3,150 5,000 5,300 3,920 2,080 8,000 6,810 6,000 3,000 Maintenance Costs $1,716 1,720 1,740 1,740 1,758 1,818 1,825 1,780 1,914 1,860 1,855 1,749 Utility Costs $1,100 1,158 1,171 1,198 1,268 1,274 1,205 1,117 1,400 1,362 1,347 1,193 Michael estimates the number of shirts to be sold in the first five quarters, beginning at the start of the new year, to be: 8,000 First quarter, year 1 Second quarter, year 1 10,000 Third quarter, year 1 20,000 Fourth quarter, year 1 12,000 First quarter, year 2 18,000 Michael decides to establish his company as a regular or C-corporation. He will invest $10,000 of his personal savings in the company. Seeing how determined his son was to become an entrepreneur, Michael's father offered to co-sign a note for an amount up to $20,000 to help Michael open his shirt shop, Screenshot Tops, Inc. However, when Michael and his father approached the loan officer at First Guarantee Bank, the loan officer asked Michael to produce the following budgets for 2022. Sales budget ● Schedule of expected collections from customers for shirt purchases budget Schedule of expected payments for purchases ● • Silk-screen labor budget • Selling and administrative expenses budget ● Silk-screen overhead expenses budget • Budgeted income statement ● Cash budget • Budgeted balance sheet The loan officer advised Michael that the interest rate on a 12-month loan would be 8%. Michael expects the loan to be taken out as of January 1 when he purchases the equipment. Michael has estimated that his income tax rate will be 20%. He expects to pay the total tax due when the returns are filed in 2023. 2. If the company has sales of $12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with a) utilities and b) maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.) c) Compute the expected total maintenance and utility cost at $12,000 Sales volume. 3. Using the format below, prepare a sales budget for the year ending 20xx. Screenshot Tops, Inc. Sales Budget For the Year Ended December 31, 20xx Quarter 3 1 2 4 Year Expected unit sales Unit selling price Budgeted sales revenue 4. Prepare a schedule of expected collections from customers. Screenshot Tops, Inc. Schedule of Collections from Customers For the Year Ended December 31, 20xx Quarter 1 2 Accounts receivable 1/1/xx First quarter Second quarter Third quarter Fourth quarter Total collections -0- 3 4 Year
Expert Answer:
Answer rating: 100% (QA)
1 Under the given scenario it is quite advisable that Michael stipulates the four criteria while he ... View the full answer
Related Book For
Financial Accounting A User Perspective
ISBN: 978-0470676608
6th Canadian Edition
Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry
Posted Date:
Students also viewed these accounting questions
-
The following details are available from XY company, calculate Cash flow from Operating Activities: LIABILITIES Share capital Debentures Reserve for doubtful debts Trade creditors Profit and Loss A/c...
-
Michael just graduated with a degree in Accounting from State University. He worked hard in school but could only achieve a 2.95 GPA because he worked 40 hours a week to pay his own way through...
-
After graduating from Vanderbilt University with a degree in economics, James Pettes worked for Video Magic, a video rental business. In 1987, Dr. Gordon Yukon, a pediatrician, wanted to invest in a...
-
Is an isothermal process necessarily internally reversible? Explain your answer with an example.
-
Flaherty Company entered into a business combination with Steeley Company in March 2001. The combination was accounted for as a pooling of interests. Registration fees were incurred in issuing common...
-
Exercises 1418 show how the model for run production in the text can be used to determine baseball strategy. Suppose that you are managing a baseball team and have access to the matrices M and SM for...
-
Explain how search can be used to solve constraint satisfaction problems, such as the eight-queens problem. What difficulties arise when such problems become extremely large (e.g., the...
-
In one study of smokers who tried to quit smoking with nicotine patch therapy, 39 were smoking one year after the treatment and 32 were not smoking one year after the treatment (based on data from...
-
The September 30 bank statement for Cadieux Company and the September ledger account for cash are summarized here: BANK STATEMENT Checks Deposits Other Balance Balance, September 1 $ 1,840 September...
-
Part A Walmart Stores (Walmart) is the world's largest retailer. It employs an ''everyday low price'' strategy and operates stores as three business segments: Walmart Stores U.S., International, and...
-
Accounts Payable Accounts Receivable Cash Inventory and Sales Revenue are not involved in the Other Accounts column in either the cash receipts or cash payments journal and are not involved in any...
-
My elevator pitch for the purchase of an MRI machine is as follows: Hi there, my name is Kayla and I am one of the administrators here at Highlands Regional. Did you know that our MRI machine was...
-
Yvonne can use two coupons for the same purchase at her favorite department store. One coupon gives her $20 off and the other gives her 25% off. She wants to buy a bedspread that sells for...
-
Scenario 17:Accountant 17 is the former manager of the audit dept. She says: when covid hit I decidedto retire. I was a cpa for 30 years but im no longer practicing, can I still call myself a cpa? Do...
-
The following information is presented for the year-end reporting for Alcoy, LLC: Sales Price per Unit $24, Total Fixed Costs 150,000, Variable Cost per Unit 8, Total Units Sold 14,000. How much is...
-
Phelps competed at the Olympics. He won several gold medals and cash prizes, all worth $300,000. In addition, in the year that Phelps competed in the Olympics, he received several commercial...
-
A hurricane caused extensive damage to a town in Nova Scotia. Various homes, vehicles and businesses are either partially or heavily damaged. In addition some people are also injured. Several claims...
-
In Exercises 516, find the focus and directrix of the parabola with the given equation. Then graph the parabola. y 2 = 4x
-
The 2009 financial statements of Winpak Ltd. contained the following information, in thousands of US dollars. (Winpak sells high-quality packaging materials and packaging machines.) Required: a. What...
-
Indicate whether each of the following business entities is more likely to be established as a sole proprietorship (SP), partnership (P), or corporation (C). Provide reasons for your choice. a. A...
-
Under the cash basis of accounting, the purchase of a new piece of equipment for cash would be treated as an expense of the accounting period when the purchase occurred. a. If you were a shareholder,...
-
Which of the following statements about the competence of evidence is always true? a. Evidence gathered by an auditor from third parties is reliable. b. Accounting data developed when control risk is...
-
A public company's audit committee should consist of: a. Representatives of management, shareholders, suppliers, and customers. b. The audit partner, chief financial officer, legal counsel, and at...
-
An independent auditor has been approached to perform an audit. Research suggests that the auditor may fail to: a. Distinguish between a regulated and nonregulated industry. b. Coordinate audit dates...
Study smarter with the SolutionInn App