PA8-6 Preparing Operating Budgets for a Merchandising Firm

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 - 40,000

Quarter 2 - 60,000

Quarter 3 - 30,000

Quarter 4 - 60,000

Each T-shirt is expected to sell for $15.

The purchasing manager buys the T-shirts for $6 each.

The company needs to have enough T-shirts on hand at the end of each quarter to fill 25 percent of the next quarter's sales demand.

Selling and administrative expenses are budgeted at $80,000 per quarter plus 10 percent of

total sales revenue.

Required:

Prepare the following operating budgets for quarters 1, 2, and 3. (You do not have enough information to complete quarter 4.)

1. Sales budget.

2. Merchandise purchases budget.

3. Cost of goods sold budget.

4. Selling and administrative expense budget.

5. Budgeted income statement.