Question

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: Budgeted Unit Sales Quarter 1 35,000 Quarter 2 55,000 Quarter 3 27,500 Quarter 4 55,000 • Each T-shirt is expected to sell for $10. • The purchasing manager buys the T-shirts for $4 each. • The company needs to have enough T-shirts on hand at the end of each quarter to fill 20 percent of the next quarter's sales demand. • Selling and administrative expenses are budgeted at $70,000 per quarter plus 12 percent of total sales revenue. Required: 1. Determine budgeted sales revenue for each quarter. Quarter 1 Quarter 2 Quarter 3 Budgeted Sales Revenue 2. Determine budgeted cost of merchandise purchased for each quarter. Quarter 1 Quarter 2 Quarter 3 Budgeted Cost of Merchandise Purchased

Answer 1

Solution 1) Calculation of Budgeted Sales Revenue for each Quarter

	Quarter 1	Quarter 2	Quarter 3
Budgeted Unit Sales	35,000	55,000	27,500
Expected Selling Price per unit $	10.00	10.00	10.00
Budgeted Sales Revenue $ = Budgeted Sales Units x Expected Selling Price per unit $	3,50,000.00	5,50,000.00	2,75,000.00

Solution 2) Calculation of Budgeted Cost of Merchandise Purchased for each Quarter

	Quarter 1	Quarter 2	Quarter 3
Budgeted Sales (Units)	35,000	55,000	27,500
Add: Closing Stock (Units)	20% of 55,000 = 11,000	20% of 27,500= 5,500	20% of 55,500= 11,000
Less: Opening Stock (Units)	20% of 35,000 = 7,000	11,000	5,500
Number of T-shirts to be Purchased	39,000	49,500	33,000
Cost per T-shirt $	4.00	4.00	4.00
Budgeted Cost of Merchandise Purchased $ = Number of T-shirts to be Purchased x Cost per T-shirt $	1,56,000.00	1,98,000.00	1,32,000.00

Solution 3) Calculation of Budgeted Cost of Goods Sold for each Quarter

	Quarter 1	Quarter 2	Quarter 3
Opening Stock $ = Opening Stock (Units) x Cost per unit	28,000.00	44,000.00	22,000.00
Add: Budgeted Cost of Merchandise Purchased $	1,56,000.00	1,98,000.00	1,32,000.00
Less: Closing Stock $ = Closing Stock (Units) x Cost per unit	44,000.00	22,000.00	44,000.00
Cost of Goods Sold	1,40,000.00	2,20,000.00	1,10,000.00

Solution 4) Calculation of Selling and Administrative Expenses for each Quarter

	Quarter 1	Quarter 2	Quarter 3
Fixed Administrative Expenses per Quarter $	70,000.00	70,000.00	70,000.00
Selling Expenses $ = 12 % of Sales Revenue $ for the Quarter	42,000.00	66,000.00	33,000.00
Budgeted Selling and Administrative Expenses $ = Fixed Administrative Expenses per Quarter $ + Selling Expenses $	1,12,000.00	1,36,000.00	1,03,000.00

Solution 5) Budgeted Income Statement for each quarter

	Quarter 1	Quarter 2	Quarter 3
Budgeted Sales Revenue $	3,50,000.00	5,50,000.00	2,75,000.00
Cost of Goods Sold
Budgeted Opening Stock $ = Opening Stock (Units) x Cost per unit	28,000.00	44,000.00	22,000.00
Add: Budgeted Cost of Merchandise Purchased $	1,56,000.00	1,98,000.00	1,32,000.00
Less: Budgeted Closing Stock $ = Closing Stock (Units) x Cost per unit	44,000.00	22,000.00	44,000.00
Budgeted Cost of Goods Sold $	1,40,000.00	2,20,000.00	1,10,000.00
Budgeted Gross Margin $ = Budgeted Sales Revenue $ - Budgeted Cost of Goods Sold $	2,10,000.00	3,30,000.00	1,65,000.00
Budgeted Selling and Administrative Expenses $
Fixed Administrative Expenses $	70,000.00	70,000.00	70,000.00
Selling Expenses $	42,000.00	66,000.00	33,000.00
Total Budgeted Selling and Administrative Expenses $	1,12,000.00	1,36,000.00	1,03,000.00
Budgeted Net Operating Income $ = Budgeted Gross Margin $ - Total Budgeted Selling and Administrative Expenses $	98,000.00	1,94,000.00	62,000.00