The Sales Budget must be prepared first as it affects all the other budgets. In order to prepare the sales budget an estimate of the expected number of units to be sold and the expected sales price needs to be determined. To prepare the sales budget we used the following assumptions. Statistics for tourism in Hawaii are available from the www.hawaiitourismauthority.org and the Department of Business, Economic Development and Tourism of the State of Hawaii ( Hawaii.gov/debdt ).

• Number of visitors to the island from January 2007 to May 2007 were 125,000, 125,000, 150,000, 125,000 and 125,000, respectively. (For simplicity, we assume each visitor, on average, purchases one milk shake. (Students can get more elaborate and research the average number of days visitors stay and the average number of couples, versus families with kids).

• The sales mix and the sales price will be consistent with the first part of the case at 40% small and 60% large with the sales price set at the competitors price of $10 for large and $7 for small (less the resort fee of 10%).

SALES BUDGET for 1st qtr	January	February	March	1stqtr Total	April	May
Large shakes expected to be sold: (visitors*.60)	75000	75000	90000	240000	75000	75000
Expected sales price ($10*90%)	9	9	9		9	9
Total sales ($)	675000	675000	810000	2160000	675000	675000
Small shakes expected to be sold: (visitors * .40)	50000	50000	60000	160000	50000	50000
Expected sales price ($7*90%)	6.3	6.3	6.3		6.3	6.3
Total sales ($)	315000	315000	378000	1008000	315000	315000
TOTAL SALES	990000	990,000	1188000	3168000	675000	675000

The next budget to be prepared is the Production budget, where the number of milk shakes needed to be produced (based on the sales budget) are determined. This will equal:

Number of milk shakes expected to be sold

+ safety stock (ending finished goods inventory) in case demand is higher than predicted

Total milk shakes needed

Less: Beginning finished goods inventory (which is zero at the start of business)

Milk shakes needed to be produced

To prepare the production budget we used the following assumptions:

• 10% of next months expected milk shake sales is desired to be left in ending inventory as a safety cushion.
• Remember, beginning inventory is last months ending inventory.

PRODUCTION BUDGET - 1stQTR	January	February	March	1st Qtr total	April
Large shakes (sales budget)
+ desired ending inventory
Total needed
Less: beginning inventory
Large shakes to produce

PRODUCTION BUDGET - 1stQTR	January	February	March	1st Qtr total	April
Small shakes (sales budget)
+ desired ending inventory
Total needed
Less: beginning inventory
Small shakes to produce

. ANSWERS TO THE FIRST PART OF THE CASE: Presented below is one possible answer to this case using only information provided in the case with the following assumptions: 1) the milkshake's sales-mix will be 60% large and 40% small, 2) the suggested sales prices are used to be competitive with other vendors, and the milkshake makers, tables and benches are assumed to last for 3 years, but the refrigerator/freezer and counter tops are assumed to last for 10 years and the sign is assumed to last only one year. Since this is a simulation exercise, the case allows students to see how the break-even sales volume changes depending upon different assumptions about product sales-mix, sale prices, depreciable lives of long-term assets as well as variable costs, and allows them to add other necessary fixed costs to the cost structure of the business conditional on their own unique business strategy. Consequently, their answers may vary. Monthly fixed costs: Salary of 2 part-time workers 1,600.00 Rental 500.00 Supplies 100.00 Milk Shake Maker depreciation 20.00_720/36months) Refrigerator/freezer depreciation 4.00 (480/120 months) Counter tops depreciation 10.00 (1,200/120months) Tables and benches depreciation 20.00 (1,080/36 months) Annual insurance 50.00 (600/12months) Interest on loan 101.24 Advertising expense 5,000.00 Accounting and bookkeeping expense 500.00 Owner's salary and benefits 8,000.00 Dues and membership fees 167.00 Licenses and permit fees 50.00 Maintenance services 400.00 Office supplies 300.00 Sign 837_4100/12months) Total monthly Fixed Costs $16,840.61 +Variable Costs per unit: Ingredient Cost Whole milk $15 for 640 oz. Cream $20 for 128 oz. Sugar $10 for 30 cups Premium Vanilla Ice Cream $24 for 600 oz. Flavorings Flavored Specialty Straws Cups-8 ounces $200 for 500 cups Cups-12 ounces $250 for 500 cups TOTAL DIRECT MATERIAL COST PER UNIT 0.02344 per oz. 0.15625 per oz. 0.33333 per cup 0.04000 per oz. Small Large 0.05 0.07 0.31 0.47 0.17 0.25 0.36 0.25 0.40 0.75 0.40 0.24 0.75 0.40000 per cup 0.50000 per cup 0.50 $2.17 $2.80 Variable Cost Income Statement: using a 40% (small) and 60% (large) sales-mix in determining the break-even sales volume: Small (40%) $7*90%=6.3*40% 2.520 Sales after taking out the 10% owed to resort Large (60%) $10*90%-$9*60%= 5.400 Weighted total 7.920 per unit Variable cost 2.17*40%=.868 2.80*60%=1.680 2.548 per unit Contribution margin 1.652 3.720 5.372 per unit Total Fixed costs 16,840.61 per month 1) You will need to sell 3,135 milkshakes/month to break even = ($16,840.61/5.372) 1,254 (3,135*40%) will be small and 1,881 (3,135*60%) will be large. Variable Cost Income Statement: using 40% (small) and 60% (large) sales-mix in determining the break-even sales volume (no salary allowance for owner): Small (40%) Large (60%) Weighted total Sales after taking out 10% $6.30*1,254milkshakes $9*1,881 milkshakes $24,829.20 owed to resort $7,900.20 $ 16,929.00 - Variable cost $2.17*1,254milkshakes $2.80*1,881milkshakes $ 7,987.98 $2.721.18 $5,266.80 Contribution margin $5,179.02 $11,662.20 $16,841.22 Total Fixed costs $16,840.61 Net Income 0.61 rounding error Note: The break even sales volume is 3,134.89 milkshakes. The Variable Cost Income Statement uses the breakeven quantity of 3,135 milkshakes. A small gain is shown due to rounding error since you cannot sell fractional milkshakes