Quantum Graphics makes custom T-shirts and other promotional products for studen
ID: 2454208 • Letter: Q
Question
Quantum Graphics makes custom T-shirts and other promotional products for student organizations and businesses. It plans to open a new location in Austin, Texas. It has secured a corporate contract with Dell Computer Corporation that will generate $5,500 per month in sales. With the new contract and potential student organizations from colleges in San Marcos to Georgetown, it needs to plan for its first quarter of operations. Quantum Graphics expects cash sales from student organizations to be $2,750, $2,500, and $1,000 for Month 1, Month 2, and Month 3, respectively. Its corporate sales are always made on account. Based on previous history, Quantum Graphics expects to collect 100% of its corporate sales in the following month of the original sale (e.g. Month 1 account sales are collected in Month 2, Month 2 account sales are collected in Month 3, etc.). Quantum Graphics’ cost of goods sold is projected to be 40% of all sales. Its selling, general and administrative expenses are 16% of all sales (Donations 10% + Advertising 5% + Miscellaneous 1% = 16%). It does not keep any inventory on hand and pays its accounts payable balances in full in the following month of purchase. Quantum Graphics' owner invested $1,500 in this venture. The $1,500 will be used to prepay the first three months of rent. Quantum Graphics signed a three month lease because it is in negotiations to purchase a rundown building for $3,000 located just south of Austin. It believes it will be able to buy the building at the asking price and will need to make a cash payment in Month 3 for the building. If Quantum Graphics is short of cash, it has access to a line of credit with an interest rate of 10%. The total line of credit is $5,000. It will borrow the money at the beginning of the month to avoid a cash shortage. Quantum Graphics will only repay the loan when it has enough cash to pay the full balance and maintain an adequate ending cash balance. All loans that are repaid are repaid on the last day of the month. Quantum Graphics must always maintain an ending cash balance of at least $300. An owner’s draw of $2,000 is made every month. (Note: sole proprietors and partnerships take owner’s draws, stockholders receive dividends). Based upon the information provided, complete the operations budget and answer the questions in Connect. When making calculations always round up (i.e. 33 × 7% = 2.31, round up to 3.00). You may also assume that there are 30 days in each month of the first quarter.
1.What is the total projected sales for the first quarter of operations?
2.How much cash does Quantum Graphics expect to collect in the first quarter of operations?
3.What is the projected payments for purchases in the first quarter of operations?
4.What is the total projected Cost of Goods Sold for the first quarter of operations?
5.What is the total projected SG&A expense?
6.What is the total projected cash payments for SG&A expense?
Explanation / Answer
SALES BUDGET Month 1 Month 2 Month 3 Cash sales 2750 2500 1000 Credit sales 5500 5500 5500 Total 8250 8000 6500 INVENTORY PURCHASES BUDGET Cost of Goods 40% 0f sales 3300 3200 2600 SELLING & GENERAL ADMINISTRATION BUDGET Donations10% on sales 825 800 650 Advertising 5% on sales 413 400 325 Misc.1% 82.5 80 65 Total 1320 1280 1040 Month 1 Month 2 Month 3 CASH BUDGET Amt inv 1500 Opening cash balance 430 1350 Credit sale collcetions 5500 5500 Cash sales 2750 2500 1000 Borrowings 0 0 2210 4250 8430 10060 A/cs payables 3300 3200 S&GA 1320 1280 1040 Rent 500 500 500 Building purchase 3000 Drawings 2000 2000 2000 Interest @ 10% p.a. 0 18 0 3820 7080 9758.417 Balance 430 1350 302 Proforma Income Statement for the 3 months Month 1 Month 2 Month 3 Total Sales 8250 8000 6500 22750 Less: Cost of goods sold 3300 3200 2600 9100 Gross Margin 4950 4800 3900 13650 Less S&GA 1320 1280 1040 3640 Rent 500 500 500 1500 Interest @ 10% p.a. 0 18 18 Net income 3130 3020 2342 8492