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    Preparing an operating budget

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    Terry's Equipment Center has been organized to sell a line of lawn and garden equipment. The company began operations on January 1 with the following assets:

    Cash $14,000
    Inventory 29,000
    Land 31,000
    Buildings and equipment $250,000
    (useful life 20 years, no residual value, of which $210,000 relates to selling and $40,000 to general and administrative activities)

    Sales for January, February, and March (i.e., the first quarter) are expected to be $140,000; they are expected to be $280,000 for the next three months, and $325,000 for the three months after that. Certain expenses are expected to vary with sales as follows:

    Percent of Sales Dollars
    Cost of goods sold 60
    Bad debts 2
    Variable selling expenses 14
    Variable administrative expenses 5

    Other expenses not expected to vary with sales:

    Selling $25,000 per quarter
    Administrative 18,550 per quarter
    Depreciation 3,125 per quarter

    Prepare an operating budget for the first and second quarters of operations for Terry's Equipment Center.

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    Solution Summary

    The solution prepares an operating budget for Terry's equipment center. The first and second quarters are analyzed.