Simid Sports Co. Case Study

M odule 6 Case Study Near the end of 2013, the management of Simid Sports Co., a manufacturing company, prep ar ed t he f oll ow ing est im at ed bal anc e sh eet for D ec em ber 31, 2013. To prep ar e a m ast er budget f or J anu ary, Febru ary, and Marc h of 2014, m anag em ent 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 wh ic h is 20% of t he next m ont h’s exp ec t ed sal es (in unit s). Exp ec t ed sal es ar e: o January, 3,500 units; o February, 4,500 units; o March, 5,500 units; and o April, 5,000 units. • Cash s al es and c redit sales repr es ent 25% and 75%, respec t ively, of t ot al s al es. Of t he credit sales, 60% is c ollec t ed in t he first m ont h aft er t he m ont h of sal e and 40% in t he sec ond m ont h aft er t he m ont h of s ale. For t he D ec em ber 31, 2013, acc ount s rec eiv abl e balance, $62,500 is collected in January and the remaining $200,000 is collec ted in Febru ary. • Merc handis e purc has es ar e paid f or as f oll ow s: 20% in t he first m ont h aft er t he m ont h 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 c omm issions equ al t o 20% of sal es ar e paid eac h m ont h. Sales s al ar ies (excluding commissions) are $30,000 per year. • Gen er al and adm inist rat ive s al ari es ar e $72, 000 per year. Maint en anc e exp ens e equ als $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 depreciat ed over eight years using the straight -line m et hod wit h no salv ag e v alu e. The foll ow ing am ount s for new equipm ent purc hases 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 salv ag e v alu e. A full m ont h’s deprec iat ion is t ak en f or t he m ont h in w h ich equipment is purchased. • The company plans to acquire land at the end of March at a cost of $75,000, which will be paid f or w it h c ash on t he last day of t he m ont h. • Simid Sport s has a w orking arr ang em ent w it h it s bank t o obt ain addit ion al loans as need ed . The interest rate is 12% per year, and interest is paid at each month- end b as ed on the beginning balance. Partial or full payments on these loans can be made on the last day of t he m ont h. The company has agreed to maintain a minimum ending cash bal anc e o f $12,500 each month. • The inc om e t ax r at e f or t he c om pany is 40%. I nc om e t axes on t he first quar t er’s inc om e will not be paid until April 15.