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Sweats Galore, Inc.
Developed by Jessica Johnson Frazier, Eastern Kentucky University,
and PatriciaH. Mounce, University of Central Arkansas
The Business Situation
After graduating with a degree in business from Eastern University in Campus
Town, USA, Michael Woods realized that he wanted to remain in Campus Town.
After a number of unsuccessful attempts at getting a job in his discipline, Michael
decided to go into business for himself. In thinking about his business venture,
Michael determined that he had four criteria for the new business:
1. He wanted to do something that he would enjoy.
2. He wanted a business that would give back to the community
3. He wanted a business that would grow and be more successful every year.
4. Realizing that he was going to have to work very hard, Michael wanted a business that would generate a minimum net income of $25,000 annually.
While reflecting on the criteria he had outlined, Michael, who had been president of his fraternity and served as an officer in several other student organizations, realized that there was no place in Campus Town to have custom sweatshirts
made using a silk-screen process. When student organizations wanted sweatshirts
for their members or to market on campus, the officers had to make a trip to a city
100 miles away to visit “Shirts and More.”
Michael had worked as a part-time employee at Shirts and More while he
was in high school and had envisioned owning such a shop. He realized that a
sweatshirt shop in Campus Town had the potential to meet all four of his criteria. Michael set up an appointment with Jayne Stoll, the owner of Shirts and
More, to obtain information useful in getting his shop started. Because Jayne
liked Michael and was intrigued by his entrepreneurial spirit, she answered many
of Michael’s questions.
In addition, Jayne provided information concerning the type of equipment
Michael would need for his business and its average useful life. Jayne knows a
competitor who is retiring and would like to sell his equipment. Michael can purchase the equipment at the beginning of 2013, and the owner is willing to give him
terms of 50% due upon purchase and 50% due the quarter following the purchase.
Michael decided to purchase the following equipment as of January 1, 2013.
CA-20
case 6 Cases for Management Decision-Making
Useful
Cost Life
Hand-operated press that applies ink to the shirt $7,500 5 yrs.

Light-exposure table 1,350 10 yrs.
Dryer conveyer belt that makes ink dry on the shirts 2,500 10 yrs.
Computer with graphics software and color printer 3,500 4 yrs.
Display furniture
Used cash register
2,000 10 yrs.
500 5 yrs.

Michael has decided to use the sweatshirt supplier recommended by Jayne.
He learned that a gross of good-quality sweatshirts to be silk-screened would cost
$1,440. Jayne has encouraged Michael to ask the sweatshirt supplier for terms
of 40% of a quarter’s purchases to be paid in the quarter of purchase, with the
remaining 60% of the quarter’s purchases to be paid in the quarter following the
purchase.
Michael also learned from talking with Jayne that the ink used in the silkscreen process costs approximately $0.75 per shirt.
Knowing that the silk-screen process is somewhat labor-intensive, Michael
plans to hire six college students to help with the process. Each one will work
an average of 20 hours per week for 50 weeks during the year. Michael estimates
total annual wages for the workers to be $72,000.
In addition, Michael will need one person to take orders, bill customers, and
operate the cash register. Cary Sue Smith, who is currently Director of Student
Development at Eastern University, has approached Michael about a job in sales.
Cary Sue knows the officers of all of the student organizations on campus. In
addition, she is very active in the community. Michael thinks Cary Sue can bring
in a lot of business. In addition she also has the clerical skills needed for the
position. Because of her contacts, Michael is willing to pay Cary Sue $1,200 per
month plus a commission of 10% of sales. Michael estimates Cary Sue will spend
50% of the workday focusing on sales, and the remaining 50% will be spent on
clerical and administrative duties.
Michael realizes that he will have difficulty finding a person skilled in computer graphics to generate the designs to be printed on the shirts. Jayne recently
hired a graphics designer in that position for Shirts and More at a rate of $500 per
month plus $0.10 for each shirt printed. Michael believes he can find a university
graphics design student to work for the same rate Jayne is paying her designer.
Michael was fortunate to find a commercial building for rent near the university and the downtown area. The landlord requires a one-year lease. Although
the monthly rent of $1,000 is more than Michael had anticipated paying, the
building is nice, has adequate parking, and there is room for expansion. Michael
anticipates that 75% of the building will be used in the silk-screen process and
25% will be used for sales.
Michael’s fraternity brothers have encouraged him to advertise weekly in the
Eastern University student newspaper. Upon inquiring, Michael found that a 3″ x
3″ ad would cost $25 per week. Michael also plans to run a weekly ad in the local
newspaper that will cost him $75 per week.
Michael wants to sell a large number of quality shirts at a reasonable price.
He estimates the selling price of each customized shirt to be $16. Jayne has
suggested that he should ask customers to pay for 70% of their purchases in
the quarter purchased and pay the additional 30% in the quarter following the
purchases.
After talking with the insurance agent and the property valuation administrator in his municipality, Michael estimates that the property taxes and insurance
on the machinery will cost $2,240 annually; property tax and insurance on display furniture and cash register will total $380 annually.
SWEATS
GALORE case 6 Cases for Management Decision-Making
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 confident 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 first five quarters,
beginning January 2013, to be:

First quarter, year 1 8,000
Second quarter, year I 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 officer at First Guarantee Bank, the loan officer 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 officer 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 I, 2013.
Michael has estimated that his income tax rate will be 20%. He expects to pay
the total tax due when his returns are filed in 2014.
Instructions
Answer the following questions.
1. Do you think it was important for Michael to stipulate his four criteria for the business
(sec page CA-20), including the goal of generating a net income of at least $25,000 annually? Why or why not?
case 6 Cases for Management Decision-Making .s A..p• 4SWEATS GALORE CA-23
2. If the company has sales of $12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with utilities and maintenance using the high-low method for each. (Round unit variable costs to three decimal
places where necessary.)
3. Using the format below, prepare a sales budget for the year ending 2013.
Sweats Galore, Inc.
Sales Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Year
Expected unit sales
Unit selling price
Budgeted sales revenue
4. Prepare a schedule of expected collections from customers.
Sweats Galore, Inc.
Schedule of Expected Collections from Customers
For the Year Ending December 31, 2013
Quarter
1 2 3 4
Accounts receivable 1/1/13 -0-
First quarter
Second quarter
Third quarter
Fourth quarter
Total collections
5. Michael learned from talking with Jayne that the supplier is so focused on making
quality sweatshirts that many times the shirts arc not available for several days. She
encouraged Michael to maintain an ending inventory of shirts equal to 25% of the next
quarter’s sales.
Prepare a shirt purchases budget for shirts using the format provided.
Sweats Galore, Inc.
Shirt Purchases Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Year
Shirts to be silk-screened
Plus: Desired ending inventory
Total shirts required
Less: Beginning inventory
Total shirts needed
Cost per shirt
Total cost of shirt purchases
6. Prepare a schedule of expected payments for purchases.
Sweats Galore, Inc.
Schedule of Expected Payments for Purchases
For the Year Ended December 31, 2013
Quarter
1 2 3 4
Accounts payable 1/1/13 -0-
First quarter
Second quarter
Third quarter
Fourth quarter
Total payments
CA-24 SWEATS
GALORE case 6 Cases for Management Decision-Making
7. Prepare a silk-screen labor budget.
Sweats Galore, Inc.
Silk-Screen Labor Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Year
Units to be produced
Silk-screen labor hours per unit
Total required silk-screen labor hours
Silk-screen labor cost per hour
Total silk-screen labor cost
8. Prepare a selling and administrative expenses budget for Sweats Galore, Inc. for the
year ending December 31, 2013.
Sweats Galore, Inc.
Selling and Administrative Expenses Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Year
Variable expenses:
Sales commissions
Total variable expenses
Fixed expenses:
Advertising
Rent
Sales salaries
Office salaries
Depreciation
Property taxes and insurance
Total fixed expenses
Total selling and
administrative expenses
9. Prepare a silk-screen overhead expenses budget for Sweats Galore, Inc. for the year
ending December 31, 2013.
Sweats Galore, Inc.
Silk-Screen Overhead Expenses Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Year
Variable expenses:
Ink
Maintenance
Utilities
Graphics design
Total variable expenses
Fixed expenses:
Rent
Maintenance
Utilities
Graphics design
Property taxes and insurance
Depreciation
Total fixed expenses
Total silk-screen overhead
Direct silk-screen hours
Overhead rate per silk-screen hour
case 6 Cases for Management Decision-Making
10. Using the information found in the case and the previous budgets, prepare a budgeted
income statement for Sweats Galore, Inc. for the year ended December 31, 2013.
Sweats Galore, Inc.
Budgeted Income Statement
For the Year Ended December 31, 2013
Sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
Interest expense
Income before income taxes
Income tax expense
Net income
11. Using the information found in the case and the previous budgets, prepare a cash
budget for Sweats Galore, Inc. for the year ended December 31, 2013.
Sweats Galore, Inc.
Cash Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4
Beginning cash balance
Add: Receipts
Collections from customers
Total available cash
Less: Disbursements
Payments for shirt purchases
Silk-screen labor
Silk-screen overhead
Selling and administrative expenses
Payment for equipment purchase
Total disbursements
Excess (deficiency) of available cash
over disbursements
Financing
Borrowings
Ending cash balance
12. Using the information contained in the case and the previous budgets, prepare a budgeted balance sheet for Sweats Galore, Inc. for the year ended December 31, 2013.
Sweats Galore, Inc.
Budgeted Balance Sheet
December 31, 2013
Assets
Cash
Accounts receivable
Sweatshirt inventory
Equipment
Less: Accumulated depreciation
Total assets
SWEATS
GALORE case 6 Cases for Management Decision-Making
Liabilities and Stockholders’ Equity
Accounts payable
Notes payable
Interest payable
Taxes payable
Total liabilities
Common stock
Retained earnings
Total stockholders equity
Total liabilities and stockholders’ equity
13. (a) Using the information contained in the case and the previous budgets, calculate
the estimated contribution margin per unit for 2013. (Hint: Silk-screened labor
and the taxes are both fixed costs.)
(b) Calculate the total estimated fixed costs for 2013 (including interest and taxes).
(c) Compute the break-even point in units and dollars for 2013.
14. (a) Michael is very disappointed that the company did not have an income of $25,000
for its first year of budgeted operations as he had wanted. How many shirts would
the company have had to sell in order to have had a profit of $25,000? (Ignore
changes in income tax expense.)
(b) Why dots the company’s net income differ from its ending cash balance?
15. Do you think it was a good idea to offer Cary Sue a salary plus 10% of sales? Why or
why not?
CA-26

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