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Preparing an operating budget

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.


Solution Summary

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