ACC560 Case 6 ANSWERS - Week 11 Case 6 Sweats Galore Course...

Week 11 Case 6: Sweats Galore
Course: Managerial Accounting (ACC 560)
1 . Do you think it was important for Michael to stipulate his four criteria for the business,
including the goal of generating a net income of at least $25,000 annually? Why or why not?
Answer:
Yes, it is important for Michael to stipulate the four criteria during planning for his new business.
Michael is wise to set criteria other than simply making a profit. The first three goals are more
of a mission statement while the fourth is an objective for the company. However, the reasons
why Michael stipulating the four criteria for the business is important are as follows.
First, Michael wants to do something he enjoys. Because he has prior experience in a related
industry and he has envisioned having his own business he will be better prepared to handle the
responsibilities of this new business.
Second, Michael wants a business that would give back to the community. Michael’s positive
attitude will be reflected in the way he handles employees and customers. Michael’s business
will probably come from customers such as university groups, church groups, civic
organizations, youth athletic clubs, and secondary school groups. Because Michael is offering
quality shirts at a modest price, he will, in effect, be contributing to the community.
Third, Michael wants a business that would grow and be more successful every year. This
foresight (wanting to grow and be more successful every year) will encourage him to make
decisions that will profit the business not just in the short run, but also in the long run.
Fourth, Michael sets the goal of generating a net income of at least $25,000 annually. It is very
good to set a goal of generating a minimum net income to measure the success of a business.
The problem is that there are no plans. What is he going to do if the company doesn't have a
minimum net income of $25,000 annually? Or what if it generates a minimum net income of
$25,000 annually but there is not enough cash to sustain the business? There need to be more
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objectives to make allowances for these types of situations. There needs to be a plan of action
where goals change from period to period. Otherwise, the business cannot succeed.
2 . If Michael has sales of $12,000 during January of his first year of business, determine the
amount of variable and fixed costs associated with utilities and maintenance using the high-low
method for each.
Answer:
High-low method: Change in total costs ÷ High minus low activity level = Variable cost per unit
The difference in the high and low levels of activity is 6,000 units (= 8,000 units in September −
2,000 units in January). The difference in maintenance costs is $198 (=$1,914 in September −
$1,716 in January).
Variable cost per unit = $198/ 6,000 = $0.033
Total fixed costs = $1,914 - ($0.033 X 8,000) = $1,914 - $264 = $1,650
Therefore, estimated variable cost per unit relating to maintenance is $0.033 and total fixed
costs relating to maintenance are $1,650 .