Tony Matheson plans to graduate from college in May 2021 after spending four years earning a degree in sports and recreation management. Since beginning T-ball at age five, hes been actively involved in sports and enjoys the outdoors. Each summer growing up, he and his father would spend two weeks at a father/son outdoor camp. These fond memories are part of the reason he chose his major.

Tony is an avid outdoor adventurer, but hes disappointed in the gear thats available to him. Tony has looked all over, but he cant find the right pack to fit his needs. Tonys friend Andrea Michales also recently graduated from college with a degree in fashion design. Unfortunately, she has not been able to find a job in her field yet. In speaking with Tony about his equipment search, Andrea has an idea. She would like to work with Tony to design the perfect backpack. Tony is excited about this possibly and thinks he can monetize this and market it to outdoor enthusiasts like himself. Unfortunately, neither Tony nor Andrea has the business background needed to organize this.

This is where Suzie Ramos can help. Suzie also plans to graduate in May 2021 with a major in business. Suzie and Tony first met their sophomore year and have been friends ever since as they share a strong interest in sports and outdoor activities.

They decide to name their company Great Adventures. They will begin by manufacturing backpacks; but anticipate bringing other lines into their business.

Tony introduced Suzie to Andrea, and they hit it off immediately. Suzie indicated that the first thing we need to do is create a budget, so we know what were getting into, and also to obtain any financing needed. She asked Tony to research what their price point should be. Suzie also asked Andrea if she could build into her design the amount of material and labor needed to produce one backpack. Suzie will also need to know if any specialized equipment will need to be procured. Suzie indicated that she would begin exploring ways to allocate indirect costs into the product. She will also handle the general accounting areas of the budget.

Each founder has now settled into their roles and begin work.

It didnt take Andrea long to come up with a design. She did a lot of research on backpack designs and had extensive discussions with Tony on where he believed the designs needed improvement. What they needed was a prototype so they could cost it out and determine feasibility. Tony loved the design, but had a few suggestions that Andrea incorporated. Then she got to work on the prototype. Using the equipment, she had available and measuring production time herself she came up with the following specifications:

The variable Manufacturing Overhead came from Suzies calculations, but she warned theyre just preliminary. Well have to do a more thorough allocation later.

Tony was excited about the proto-type budget. He said at first glance he thought we could work with that and create a competitive price point. He shared the preliminary designs with some friends at local outdoor equipment stores and they loved it. Tony thinks theyre on to something.

Tony spent the next week crunching the numbers, looking at market demographics and where he believed their catchment area would be and determine that he could sell the pack at 1.50 percent above product costs. He put together a three-month sales forecast for 2021 as follows:

Budgeted Sales in Units
October	1000
November	1500
December	1500

Tony also indicated he expects that sales will grow at a modest 5% through 2022

Andrea looked at the sales figures and started getting a bit nervous. There was a lot of work to do! Its worse than that said Tony. In order for us to maintain a steady flow of sales we need some inventory on hand to meet our lead times. Tony advised Andrea that we would need 10 percent of the following months sales in ending inventory to ensure they did not have a stock out. Tony knew that delays in order would have a detrimental effect on the new companys reputation as being unreliable.

I see said Suzie; in that case we better build an ending inventory into our raw material budgets as well. We would need a 20% ending inventory based on the next months cost of goods sold.

While Andrea and Tony were busy on the design production and marketing side of the new business, Suzie was busy with the finance side. In speaking with Andrea, Suzie was informed that to meet production requirements, the company would need the following equipment:

The machines have a four-year life and no salvage value

All general and Administrative Expenses would be paid in the month

Andrea was able to find materials supplies she felt would offer quality products and be reliable. She was even able to negotiate credit terms. The suppliers were willing to allow payment in 30 days following the month of purchase.

Tony discussed the sales with the group. In discussions with potential customers, he realized they were cash strapped themselves. They would gladly take the goods on consignment, but if Great Adventures required a sale, they would need at least 30 days pas the month of sale to pay. Tony didnt want to get into a consignment arrangement, so he agreed to the terms.

Things were coming together.

The actual products cost data for three months ending 12-31-2021 was as follows:

Actual Sales in Units
October	800
November	1200
December	2500

Actual General & Administrative Costs were as follows:

Three months of actual operations went by fast! The group now had time to evaluate operations and make some decisions.

Things were pretty rocky for the first three months of their business, and they decided to fund any production needs from their savings during their growth phase of the business. However, they knew this could not continue and were intending on presenting their business plan to First National with the line of credit to be available at the first of the year. Covering their first full year of business.

Suzie met with Mrs. Cheryl Biggs Business Lending Manager at First National Bank and had a very nice conversation:

Mrs. Biggs: How are you financed currently?

Suzie: Well, each of the founders put in $10,000 of their own funds. We also borrowed an additional $10,000 in unsecured loans from our parents. Any additional shortfalls come out of our collective savings. The loans are at 6% and are due in five years.

Mrs Biggs: What do you think your financing needs will be from us?

Suzie: Were looking for $100,000 dollars as a working capital loan. We would intend to access principle as needed.

Mrs. Biggs: Well, weve done this type of loan for similar businesses, so we believe we can help. However, were going to need some information. Based on your first three months of business

1. Budgets as follows: (See Chapter 8)

1. Sales Budget
2. Production Budget
3. Direct Materials Budget
4. Direct Labor Budget
5. General and Administrative Expense Budget
6. Cash Budget

1. Variable Cost Income Statement
2. Flexible Budget
3. Breakeven level in units and dollars see chapter 2/3
4. Margin of Safety See chapter 2/3
5. Degree of Operating Leverage See Chapter 2/3
6. For any new equipment purchases we would issue a separate loan but would need a net present value analysis and a payback analysis. (See Chapter 7)
7. Terms of the line of credit would be at 12% with interest paid monthly on outstanding balances. Draws would need to be made in increments of $1,000.