KATRINA'S KIDS

Katrina's Kids is a non-profit formed in the aftermath of the fury that hit the New Orleans area in August 2005. Themission of this organization is to make library grants to schools in any of the areas hi t by Hurricane Katrina. Funds arebeing raised through the manufacture and sale of popular beaded bracelets to retailers throughout the U.S. Katrina 'sKids hopes to spread word of the disastrous impact on education for these children by advertising their mission via storedisplays.

In the current year, 2006, Katrina's Kids (KK) anticipates a surplus of $1,100,000 based upon sales of $6,840,000. Given a very successful first year with little effort, key members of the management team feel that they can expand the market significantly if they could use a publicity campaign that would make written materials more available throughout the nation. This would increase selling and administrative expenses by $125,000, however it is believed thatthis will result in a 17% increase in bracelet sales in 2007. This bump in sales could be realized at a critical time as KK. plansto begin disseminating funds sometime during the next year.

Other proposed changes for 2007 include changes in the stringing process that would result in variable manufacturingoverhead of $1.95/bracelet. This major change would cost approximately $500,000 for machinery, which is expected tohave a useful life of 10 years. Management believes that this machinery would serve to increase factory capacity from750,000 units to 1,100,000 units. KK would purchase this machinery in the first quarter (January) of 2007 and pay for it inMarch.

All bracelets are sold to retail outlets on credit. Collections for bracelets are typically made as follows: 50% in the monthof sale and 50% in the month following the month of sale. Depreciation is computed using the straight-line method and, a fullyear of depreciation will be taken in the first year. Cash disbursements for raw materials are made in the month after thepurchase. Other expenses are paid for as incurred. KK keeps a supply of bracelets on hand at the end of every monthequivalent to one month's sales. Raw materials are purchased on an as needed basis, so at the end of the month there is nobalance in raw materials inventory.

Please prepare a cash budget and a budgeted income statement for 2007. Give your assumptions.

Katrina's Kids 570,000 $12.00 $986,000.00 Sales (bracelets) Selling Price Fixed Selling & Admin Expenses (includes depreciation of $36,000) Commissions (as % of Sales $$$) Shipping (as % of Sales $$$) 5.00% 3.00% Variable Manufacturing Costs (per bracelet): Direct Materials Direct Labor Variable Overhead Fixed Manufacturing Costs (total, includes depreciation of $60,000) $4.00 $1.00 $2.00 $180,000.00 600,000 51,000 Total Production (bracelets) December's Production (bracelets) Inventory Summary: (bracelets) Finished Goods Inventory, Jan 1 Finished Goods Inventory, Dec 31 21,000 51,000 Budgeted cash balance, Dec 31 $50,000 Katrina's Kids Statement of Cost of Goods Manufactured & Sold Year Ended December 31, 2006 Cost of Goods Manufactured: Direct Materials Direct Labor Variable Overhead Fixed Manufacturing Cost $2,400,000.00 600,000.00 1,200,000.00 180.000.00 $4,380,000.00 Add: Finished Goods Inventory Jan 1 Total Available for Sale Less: Finished Goods Inventory Dec 31 Cost of Goods Sold 198,000.00 $4,578,000.00 (372,300.00 $4 205.700.00 Income Statement: Year Ended December 31, 2006 Sales less: Cost of Goods Sold Gross Margin Fixed Selling & Admin Expense Variable Selling & Admin Expense Surplus $6,840,000.00 (4.205.700.00) $2,634,300.00 (986,000.00 (547,200.00 $1.101,100,00