Simid Sports Co. Case Study

Module 6 Case Study

Near the end of 2013, the management of Simid Sports Co., a manufacturing company,

prepared the following estimated balance sheet for December 31, 2013.

To prepare a master budget for January, February, and March of 2014, management has

gathered the following information:

• Simid Sports’ single product is purchased for $30 per unit and resold for $55 per unit.

The expected inventory level of 2,500 units on December 31, 2013, is more than

management’s desired level for 2014 which is 20% of the next month’s expected sales

(in units). Expected sales are:

o January, 3,500 units;

o February, 4,500 units;

o March, 5,500 units; and

o April, 5,000 units.

• Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the

credit sales, 60% is collected in the first month after the month of sale and 40% in the

second month after the month of sale. For the December 31, 2013, accounts receivable

balance, $62,500 is collected in January and the remaining $200,000 is collected in

February.

• Merchandise purchases are paid for as follows: 20% in the first month after the month of

purchase and 80% in the second month after purchase. For the December 31, 2013,

accounts payable balance, $40,000 is paid in January and the remaining $140,000 is

paid in February.

• Sales commissions equal to 20% of sales are paid each month. Sales salaries

(excluding commissions) are $30,000 per year.

• General and administrative salaries are $72,000 per year. Maintenance expense equals

$1,000 per month and is paid in cash.

• Equipment reported in the December 31, 2013, balance sheet was purchased in January

2013. It is being depreciated over eight years using the straight-line method with no

salvage value. The following amounts for new equipment purchases are planned in the

coming quarter: January, $18,000; February, $48,000; and March, $14,400. This

equipment will be depreciated using the straight-line method over eight years with no

salvage value. A full month’s depreciation is taken for the month in which equipment is

purchased.

• The company plans to acquire land at the end of March at a cost of $75,000, which will

be paid for with cash on the last day of the month.

• Simid Sports has a working arrangement with its bank to obtain additional loans as

needed. The interest rate is 12% per year, and interest is paid at each month-end based

on the beginning balance. Partial or full payments on these loans can be made on the

last day of the month. The company has agreed to maintain a minimum ending cash

balance of $12,500 each month.

• The income tax rate for the company is 40%. Income taxes on the first quarter’s income

will not be paid until April 15.