I. Southwest Trading Company, Taos, New Mexico. Summer is approaching, and Ste-
ID: 2752179 • Letter: I
Question
I. Southwest Trading Company, Taos, New Mexico. Summer is approaching, and Ste- ven and Sue Mahan have finally decided that their idea of a successful Southwestern fumiture, art, and jewelry trading company has come of age. They know that sum mer is a popular tourist time in New Mexico and could be the best time to start this new business. The Mahans have had a long-time interest in Southwestern art and fumiture. Steven graduated from college with an economics degree about 15 years ago and received his las, Texas, as the controller of a major wholesale distributor company for many years. His wife, Sue, who will be a full partner in the business, spent the first 10 years of her career in retail sales. Over the last several years, she has assumed more administrative duties for the group she works with Steven and Sue know they bring the expertise and skill to run a successful busi- ness, but to ensure success they have been researching the market for ove ear They also know that they must be very careful and thoroughly research the business and industry they are pursuing. They have traveled extensively to New Mexico and have spent a good deal of time getting to know the local artists (primarily ski bums). They have found that there is a great demand for Southwestern furniture in Texas and elsewhere in the Southwest, and prices are high. Through their contacts with the local craftspeople, they have found that many of them would like a reliable source r displaying and selling their goods. They have been able to make tentative arrangements with a large and dependable group to supply the furniture and art ieces they will need to run the business The Mahans have decided to open a shop called Southwest Trading Company in Taos, New Mexico, and act as both a retailer and a supplier to fumiture and art out lets in Texas. Steven's extensive contacts with businesses in Dallas and Houston have en him the orders needed to make the business a success as soon as they begin shipping the goods. Sue has already begun marketing the Southwest Trading Com pany's products. Southwest Trading Company's arrangements with the local crafts people will allow very aggressive pricing of the goods to retail establishments in Texas. This aggressive pricing has been well received, and tentative orders are already giv n place. Steven has found an ideal location in Taos that is currently available. The owner is asking $275,000 for the space, but Southwest Trading has a contract, contingent on financing, for $250,000. Steven and Sue have gotten bids on remodeling and should be able to renovate the space for about $45,000. Although they will purchase the years remaining. The Mahan's have decided to invest $235,000, which represents most of their savings, into the venture. Sue's sister is also interested in the possibilities that the company exhibits and is lending Southwest Trading $90,000. Repayment on the note to Sue's building, the land is leased on a transferable lease with 65Explanation / Answer
Particulars Amount in $
Payment for Space $275,000
Renovation 45,000
Inventory 130,000
Cash 20,000
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$470,000
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Particulars 2014 2015 2016 2017 2018
Sales $275,000 $675,000 $800,000 $900,000 $900,000
Cost of Goods Sold 173,250 425,250 504,000 567,000 567,000
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Gross Profit 101,750 249,750 296,000 333,000 333,000
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Less: Gen&Adm. Exp 70,000 100,000 120,000 120,000 120,000
Selling exp. @12% 63,000 81,000 96,000 108,000 108,000
Depreciation 29,500 29,500 29,500 29,500 29,500
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Total Expenses 162500 210,500 244,500 257,500 257,500
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Income (loss)before tax (60,750) 39,250 51,500 75,500 75,500
Less: tax @34% 20,655 13,345 17,510 25,670 25,670
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Net profit (loss) (40,095) 25,905 33,990 49,830 49,830
Working note for selling exp.:
Selling expenses for 2014: (275,000×0.12) + $30,000
Selling expenses for 2014: $33,000 + $30,000 =$63,000
Working note for depreciation:
Buildings =$250,000
Renovation = 45,000
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Total assets =$295,000
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Depreciation= $295,000÷ 10 years= $29,500