Posted: June 6th, 2016
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. 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 confi dent 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. Shirts Sold Maintenance Costs Utility Costs January 2,000 $1,716 $1,100 February 2,110 1,720 1,158 March 2,630 1,740 1,171 April 3,150 1,740 1,198 May 5,000 1,758 1,268 June 5,300 1,818 1,274 July 3,920 1,825 1,205 August 2,080 1,780 1,117 September 8,000 1,914 1,400 October 6,810 1,860 1,362 November 6,000 1,855 1,347 December 3,000 1,749 1,193 Michael estimates the number of shirts to be sold in the fi rst fi ve quarters, beginning January 2013, to be: First quarter, year 1 8,000 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 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 sweatshirt shop, Sweats Galore, Inc. However, when Michael and his father approached the loan offi cer at First Guarantee Bank, the loan offi cer asked Michael to produce the following budgets for 2013. Sales budget Schedule of expected collections from customers 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 offi cer 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, 2013. Michael has estimated that his income tax rate will be 20%. He expects to pay the total tax due when his returns are fi led in 2014. Instructions Answer the following questions. 1. Do you think it was important for Michael to stipulate his four criteria for the business (see page CA-), including the goal of generating a net income of at least $25,000 annually? Why or why not?
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