Solution manual introduction to management accounting 14e by horngren ch07

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE LO1: Explain how budgets facilitate planning and coordination LO2: Anticipate possible human relations problems caused by budgets LO3: Explain potentially dysfunctional incentives in the budget process LO4: Explain the difficulties of sales forecasting LO5: Explain the major features and advantages of a master budget LO6: Follow the principal steps in preparing a master budget LO7: Prepare the operating budget and the supporting schedules LO8: Prepare the financial budget LO9: Use a spreadsheet to develop a budget (Appendix 7) CASES, FUNDACRITICAL EXCEL, MENTAL THINKING COLLAB & ASSIGNEXERCISES INTERNET MENT AND EXERCISE MATERIAL EXERCISES PROBLEMS S A1,B1 25 40 22 39, 40 23 42 A1,B1 24,26 39 A1,B1 29 40 43,45 A1,B1 28,29,30,31 40 43,45,46,48 A1,B1 27,29,32,33, 34,35 36,37,38 43,44,47,48 41,42 382 49 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER The Master Budget 7-A1 (60-90 min.) Note: The first printing of the text has an error The following four accounts should be changed to the following: Inventory $ 434,000 Total assets 1,000,000 Accounts payable 489,000 Total liabilities and owners’ equities 1,000,000 Exhibit I BETTERBUY ELECTRONICS, INC Mall of America Store Budgeted Income Statement For the Three Months Ending August 31, 20X8 Sales Cost of goods sold (.62 x $1,500,000) Gross profit Operating expenses: Salaries, wages, commissions $300,000 Other expenses 60,000 Depreciation 7,500 Rent, taxes and other fixed expenses 165,000 Income from operations Interest expense* Net income * See schedule g for calculation of interest 383 $1,500,000 930,000 $ 570,000 532,500 $ 37,500 6,640 $ 30,860 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit II BETTERBUY ELECTRONICS, INC Mall of America Store Cash Budget For the Three Months Ending August 31, 20X8 Beginning cash balance Minimum cash balance desired (a) Available cash balance June July August $29,000 $25,000 $25,443 25,000 25,000 25,000 $ 4,000$ $ 443 Cash receipts & disbursements: Collections from customers (schedule b) $ 376,000 $ 607,000 $454,000 Payments for merchandise (schedule d) (434,000) (248,000) (248,000) Fixtures (purchased in May) (55,000) Payments for operating expenses (schedule f) (223,000) (151,000) (151,000) (b) Net cash receipts & disbursements $(336,000 )$ 208,000 $55,000 Excess (deficiency) of cash before financing (a + b) (332,000) 208,000 55,443 Financing: Borrowing, at beginning of period $ 332,000$ -$ Repayment, at end of period (202,000) (54,000) Interest, 10% per annum (5,557)* (1,083)* (c) Total cash increase (decrease) from financing $332,000 $(207,557) $(55,083) (d) Ending cash balance (beginning balance + b + c) $ 25,000 $ 25,443 $ 25,360 * See schedule g 384 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit III BETTERBUY ELECTRONICS, INC Mall of America Store Budgeted Balance Sheet August 31, 20X8 Assets Cash (Exhibit II) Accounts receivable* Merchandise inventory Total current assets Net fixed assets: $168,000 less depreciation of $7,500 Total assets Liabilities and Owners’ Equity $ 25,360 Accounts payable 432,000 Notes payable 186,000 Total current liabilities $643,360 Owners' equity: $511,000 plus net 160,500 income of $30,860 $803,860 Total equities *July sales, 20% x 90% x $400,000 August sales, 100% x 90% x $400,000 Accounts receivable (to Exhibit III) ** See schedule g June Schedule a: Sales Budget Credit sales (90%) Cash sales (10%) 150,000 Total sales (to Exhibit I) 541,860 $803,860 $ 72,000 360,000 $432,000 July August $630,000 $360,000 $360,000 $1,350,000 70,000 40,000 40,000 $700,000 $400,000 $400,000 $1,500,000 385 $186,000 76,000** $262,000 Total To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Schedule b: Cash Collections Cash sales On accounts receivable from: April sales May sales June sales July sales Total collections (to Exhibit II) June July August $ 70,000 $ 40,000 $ 40,000 54,000 252,000 $376,000 63,000 504,000 $607,000 126,000 288,000 $454,000 Schedule c: Purchases Budget May June July August Desired purchases: 62% x next month's sales $434,000 $248,000 $248,000 $186,000 Schedule d: Disbursements for Purchases June July August Last month's purchases (to Exhibit II) $434,000 $248,000 $248,000 Other required items related to purchases Accounts payable, August 31, 2008 (62% x September sales - to Exhibit III) $186,000 Cost of goods sold (to Exhibit I) $434,000 $248,000 $248,000 Schedule e: Operating Expense Budget June July August Total Salaries, wages, commissions $140,000 $80,000 $80,000 $300,000 Other Variable expenses 28,000 16,000 16,000 60,000 Fixed expenses 55,000 55,000 55,000 165,000 Depreciation 2,500 2,500 2,500 7,500 Total operating expenses $225,500 $153,500 $153,500 $532,500 386 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Schedule f: Payments for Operating Expenses June July August Variable expenses $168,000 $ 96,000 $ 96,000 Fixed expenses 55,000 55,000 55,000 Total payments for operating expenses $223,000 $151,000 $151,000 Schedule g: Interest calculations June July August $ 332,000 $ 334,767 Beginning balance $130,000 Monthly interest expense @ 10% 2,767 2,790 1,083 Ending balance before repayment $ 334,767 337,557 131,083 Principal repayment (from statement of receipts and disbursements) (202,000) (54,000) Interest payment (5,557) (1,083) Ending balance $ 130,000 $ 76,000 This is an example of the classic short-term, self-liquidating loan The need for such a loan often arises because of the seasonal nature of a business The basic source of cash is proceeds from sales to customers In times of peak sales, there is a lag between the sale and the collection of the cash, yet the payroll and suppliers must be paid in cash right away When the cash is collected, it in turn may be used to repay the loan The amount of the loan and the timing of the repayment are heavily dependent on the credit terms that pertain to both the purchasing and selling functions of the business 387 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-B1 (60-120 min.) $ refers to New Zealand dollars See Exhibits I, II, and III and supporting schedules a, b, c, d The cash budget and balance sheet clearly show the benefits of moving to just-in-time purchasing (though the transition would rarely be accomplished as easily as this example suggests) However, the company would be no better off if it left much of its capital tied up in cash it has merely substituted one asset for another At a minimum, the excess cash should be in an interest bearing account the interest earned or forgone is one of the costs of inventory Schedule a: Sales Budget Total sales (100% on credit) January February March $62,000 $70,000 $38,000 Schedule b: Cash Collections 60% of current month's sales 30% of previous month's sales 10% of second previous month's sales Total collections $37,200 7,500 2,500 $47,200 $42,000 18,600 2,500 $63,100 $22,800 21,000 6,200 $50,000 December January February March Schedule c: Purchases Budget Desired ending inventory $39,050 $ 6,000* $ 6,000 $ 6,000 Cost of goods sold 12,500 31,000 35,000 19,000 Total needed $51,550 $37,000 $41,000 $25,000 Beginning inventory 16,000 39,050 8,050 6,000 Purchases $35,550 $ $32,950 $19,000 * Actual ending January (and beginning February) inventory level is 8,050, as inventory levels are drawn down toward desired level of $6,000 Schedule d: Disbursements for Purchases 100% of previous month's purchases $35,550 $ March 31 accounts payable 388 - $32,950 $19,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit I VICTORIA KITE Cash Budget For the Three Months Ending March 31, 2008 January February Cash balance, beginning Minimum cash balance desired 5,000 (a) Available cash balance Cash receipts and disbursements: Collections from customers (Schedule b) 50,000 Payments for merchandise (Schedule d) Rent Wages and salaries Miscellaneous expenses Dividends Purchase of fixtures (b) Net cash receipts & disbursements Excess (deficiency) of cash before financing (a + b) $25,992 Financing: Borrowing, at beginning of period Repayment, at end of period Interest, 10%, compounded monthly (c) Total cash increase (decrease) from financing (d) Cash balance, end (beginning balance + c + b) 389 $ 5,000 5,000 47,200 March $ 5,100 $34,692 5,000 100 29,692 63,100 (35,550) (32,950) (8,050) (250) (250) (15,000) (15,000) (15,000) (2,500) (2,500) (2,500) (1,500) (3,000) $ (15,400) $ 45,350 $(3,700) $(15,400) $ 45,450 $ 15,500$ - $ (15,500) (258) $ 15,500 $(15,758)$ - - $ 5,100 $ 34,692 $30,992 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 390 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit II VICTORIA KITE Budgeted Income Statement For the Three Months Ending March 31, 2008 Sales (Schedule a) Cost of goods sold (Schedule c) Gross margin Operating expenses: Rent* Wages and salaries Depreciation Insurance Miscellaneous Net income from operations Interest expense Net income $170,000 85,000 $ 85,000 $16,750 45,000 750 375 7,500 70,375 $ 14,625 258 $ 14,367 *(January-March sales less $10,000) x 10 plus x $250 391 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-43 (80-100 min.) On January 1, Salt Lake Light Opera needs to borrow $2,057,000, on April it needs an additional $562,000, on September 31 it can repay $2,014,000, but on October it must again borrow $726,000 This can be seen from the following analysis (in thousands of dollars): Beginning cash balance Minimum cash balance desired Available cash balance Cash receipts & disbursement: Collections from customers (1) Payments for supplies (2) Other expenses (3) Payments for payroll (4) (2,100) Major equipment (5) Small equipment (6) Mortgage principal (7) Mortgage interest (8) Interest on working capital (9) Net cash receipts & disbursements Excess (deficiency) of cash before financing Financing: Borrowing (at beginning of quarter) Repayment (at end of quarter) Qtr Qtr Qtr Qtr 208 200 200 200 200 200 200 200 0 Total cash increase (decrease) from financing Ending cash balance 883 1,893 4,504 2,024 (780) (200) (30) (30) (30) (30) (2,046) (2,100) (2,100) (60) (60) (125) (140) (300) (60) (125) (135) (32) (2,065)(562) 2,014 (726) (2,057) (562) 2,014 (726) 2,057 562 2,057 562 200 200 426 (100) (60) 726 (2,014) (2,014) 726 200 200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Explanations (see next page): 427 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (1) Collections are revenues for the quarter less the increase (or plus the decrease) in accounts receivable (2) Payments for supplies in the first quarter are the accounts payable carried over from 20X4 and in the third quarter (July) are the purchases in June December’s purchases will be paid for in 20X6 (3) Other expenses are $10,000 per month, paid as incurred (4) Payroll payments in the first quarter are those of December 20X4 ($646,000) plus the $700,000 from each of January and February Each other quarter they are three $700,000 payments (5) $100,000 of major equipment payments are made in September, October, November, and December (6) Small equipment payments are $20,000 each month (7) The mortgage payments semi-annually are $4,000,000 ÷ 32 = $125,000 (8) $3,500,000 x 04 = $140,000; $3,375,000 x 04 = $135,000 (9) The $32,000 payment is the interest that was payable at the end of 20X4 The result of 20X5 operations will be an increase in the working capital loan from $1,588,000 (without the accrued interest) to $3,308,000, an increase of $1,720,000: Qtr Qtr Qtr Qtr Beginning loan $1,588 $3,736 $4,406 $2,502 Accrued interest (rounded*) 91 108 110 80 Additional borrowing 2,057 562 (2,014) 726 Ending loan $3,736 $4,406 $2,502 $3,308 *The unrounded amounts of quarterly interest expense @8% are: Qtr Qtr Qtr Qtr Total $91,125 $107,453 $110,139 $80,693 $389,410 428 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Salt Lake Light Opera’s projected income statement and balance sheet for 20X5 are (in thousands): SALT LAKE LIGHT OPERA Income Statement For the Year Ended December 31, 20X5 $11,059 Revenues Expenses: Salary & wages Supplies Depreciation Other Total expenses Operating margin Interest: Mortgage Loan Net income $8,400 800 500 120 9,820 1,239 275 389 $ 575 664 SALT LAKE LIGHT OPERA Balance Sheet December 31, 20X5 Assets Cash Receivables Supplies inventory Total current assets Fixed assets 250 Total assets $ Liabilities & Equities 200 Loan payable $ 2,919 6,195 Accrued interest payable 389 600 Accounts payable 700 6,995 Payroll payable 700 5,949 Current mortgage $12,944 4,958 Total current liabilities 429 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Mortgage payable Total liabilities Owners’ Equity Total liabilities & equities 3,000 7,958 4,986 $12,944 This requirement asks for a Statement of Cash Flows Such a statement is not shown in Chapter 7, but it is covered in Chapter 16 Students who not have a background in financial accounting might be directed to skip this requirement Amounts are in thousands SALT LAKE LIGHT OPERA Statement of Cash Flows For the Year Ended December 31, 20X5 Cash flows from operating activities: Cash receipts Cash disbursements: Supplies Payroll Interest Other Net cash provided (used) by operations $9,304 [11,059 – 1,755] (980) [780 + 200] (8,346) [2,046 + (3 x 2,100)] (307) [32 + 140 + 135] (120) (449) Cash flows from investing activities: Investment in plant and equipment Net cash used for investing activities (640) (640) Cash flows from financing activities: Principal payments on mortgage Receipts from bank loan Net cash provided by financing activities (250) 1,331 1,081 Net increase (decrease) in cash (8) 430 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Beginning cash balance, 1/1/20X5 Ending cash balance, 12/31/20X5 208 $ 200 Salt Lake Light Opera has a net income of $575,000 but a shortfall in cash requiring borrowing of $1,720,000 (1,331,000 borrowed plus accrued interest of 389,000) This is not uncommon for a growing organization However, it is borrowing on a shortterm basis via a working capital loan, while the need seems to be a long-term need The $640,000 of investment is clearly long-term, but the $449,000 needed for operations also appears to be a longterm need unless receivables can be collected more quickly Therefore, SLLO should consider additional long-term borrowing, possibly a second mortgage The organization is in danger of defaulting on its loan because it cannot meet the condition that the loan must be paid off at least once a year, so it needs a loan without such a stipulation 431 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-44 (40-60 min.) HIGHLINE HOSPITAL Budgeted Cash Receipts For the Quarter Ending September 30, 20X7 (in thousands) Calculation July August September May: 3rd-party billings x 6000 x $1,080 May: patient billings x 6000 x 240 June: 3rd-party billings x 6000 x $1,080 June: patient billings x 6000 x 240 June: 3rd-party billings x 6000 x 2,700 June: patient billings x 6000 x 240 July: 3rd-party billings x 5800 x $ 1,044 July: patient billings x 5800 x 232 July: 3rd-party billings x 5800 x 2,610 July: patient billings x 5800 x 232 July: 3rd-party billings x 5800 x 1,044 July: patient billings x 5800 x 58 August: 3rd-party billings x 6000 x 2,700 August: patient billings x 6000 x 240 August: 3rd-party billings x 6000 x 1,080 August: patient billings x 6000 x 60 Sept: 3rd-party billings x 6600 x 1,188 Sept: patient billings x 6600 x 66 Total receipts from billings $5,362 $5,302 $5,470 Endowment fund income 210 210 210 Total cash receipts $5,572 $5,512 $5,680 432 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Budgeted Cash Disbursements For the Quarter Ending September 30, 20X7 (in thousands) Salaries: $1,800 + (.2 x $5,800) $1,800 + (.2 x $6,000 ) $1,800 + (.2 x $6,600) Purchases, previous month Interest Total cash disbursements July August September $2,960 $3,000 $3,120 1,450 1,500 1,800 540 $4,410 $4,500 $5,460 Budgeted Cash Receipts and Disbursements For the Third Quarter, 20X7 (in thousands) Beginning cash balance $ 350 Budgeted cash receipts ($5,572 + $5,512 + $5,680) 16,764 Less budgeted cash disbursements ($4,410 + $4,500 + $5,460) (14,370) Budgeted cash balance, September 30, 2007 $ 2,744 Minimum cash balance (.1 x $2,200) (220) Cash available for capital expenditures $ 2,524 Budgeted capital expenditures (4,000) Borrowing needed on October 1, 2007 $ (1,476) 433 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-45 (50-60 min.) MINNESOTA STATE UNIVERSITY Projected Enrollment, Credits, and Faculty Academic Year 2007-08 Undergraduate Graduate Expected enrollment 3,528 1,890 Average credit hours 25 20 b Total credit hours 88,200 37,800 c Full-time-equivalent enrollment 2,940 1,575 d Credit hours per faculty member 720 360 e Total faculty needed 122.5 105 a Total 5,418 126,000 4,515 1,080 227.5 a 98% x 3,600 = 3,528; 105% x 1,800 = 1,890 25 x 3,528 = 88,200; 20 x 1,890 = 37,800 c 88,200 / 30 = 2,940; 37,800 / 24 = 1,575 d 24 x 30 = 720; 18 x 20 = 360 e 88,200 / 720 = 122.5; 37,800 / 360 = 105 b MINNESOTA STATE UNIVERSITY Faculty Salaries Budget Academic Year 2007-08 Undergraduate Graduate Total Faculty Needed 122.5 105.0 227.5 434 Total Average Faculty Salary Salaries $61,480 $ 7,531,300 61,480 6,455,400 $13,986,700 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com MINNESOTA STATE UNIVERSITY Tuition and Legislative Revenue Budget Academic Year 2007-08 Undergrad Graduate Division Division Total Total credit hours 88,200 37,800 126,000 Less: Scholarship credit hours* 900 1,200 2,100 Tuition paying credit hours 87,300 36,600 123,900 Tuition per credit hour x $92 x $92 x $92 Total tuition budget $8,031,600 $3,367,200 $11,398,800 Full time equivalent students 2,940 1,575 4,515 Legislative apportionment per full-time equivalent student x $780 x $780 x $780 Total legislative apportionment $2,293,200 $1,228,500 $3,521,700 *30 x 30 = 900; 50 x 24 = 1,200 435 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com MINNESOTA STATE UNIVERSITY Annual Budget Shortfall Academic Year 2007-08 Budgeted operating expenditures: Faculty salaries Operation and maintenance of facilities: Salaries and wages (1.06 x $240,000) Other ($260,000 + $12,000) General Administrative Library: Acquisitions Operations Health Services Intramural athletics Intercollegiate athletics Insurance and retirement Interest Total budgeted operating expenditures Budgeted revenues: Tuition Legislative apportionment Endowment income Auxiliary services Intercollegiate athletics Total budgeted operating revenues Deficit from operations Budgeted capital expenditures Total cash needed from fund-raising 436 $13,986,700 254,400 272,000 525,000 155,000 200,000 50,000 60,000 245,000 560,000 75,000 $16,383,100 $ 11,398,800 3,521,700 210,000 335,000 300,000 $15,765,500 $ 617,600 575,000 $ 1,192,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-46 (30 min.) 10% revenue increase 10% revenue decrease Revenue $ 16,450 $ 13,459 Cost of Sales 9,212 7,537 Gross Margin 7,238 5,922 S&A Expense 4,918 4,024 Income before income taxes 2,320 1,898 Income tax expense 812 664 Net income $ 1,508 $ 1,234 10% revenue increase 10% revenue decrease Revenue $ 16,450 $ 13,459 Cost of Sales 9,212 7,537 Gross Margin 7,238 5,922 S&A Expense 4,478 4,478 Income before income taxes 2,760 1,444 Income tax expense 966 505 Net income $ 1,794 $ 939 In part 1, where all costs are variable, budgeted net income increases or decreases by 10% in proportion to the 10% change in revenue In part 2, where some costs are fixed, budgeted net income increases or decreases by a larger percentage than the 10% change in revenue 45% Gross margin Revenue $ 14,955 Cost of Sales 8,225 Gross Margin 6,730 S&A Expense 4,478 Income before income taxes 2,252 Income tax expense 788 Net income $ 1,464 43% gross margin $ 14,955 8,524 6,431 4,478 1,953 684 $ 1,269 Note how a small change in the gross margin percentage translates into a large change in budgeted net income 437 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-47 For the solution, see the Prentice Hall Web site, www.prenhall.com/ 7-48 (30-60 min.) The purpose of this exercise is to prepare a budget for an organization (an individual student) that is familiar to all students and to see the effect of assumptions on the budget Each student will have some ideas about both the revenue and expense budgets of a typical student, but these ideas will likely vary across students They will experience the process of negotiation needed to get a budget that the group can agree on When the groups get together and compare budgets, it will be instructive to see how different groups make different assumptions that lead to different budgets This should reinforce the importance of assumptions to the budget process and show how decisions made during the budget process affect the resulting budget 438 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-49 (30-45 min.) NOTE TO INSTRUCTOR This solution is based on the 2006 10-K which was the most recent set of annual results available on the web site in early 2007 when the book went to press Be sure to examine the current web site before assigning this problem, as the information there may have changed There are 12 brand lines under the corporation shell They are Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn Cruise Line and Windstar Cruises in North America; P&O Cruises, Cunard Line, Ocean Village and Swan Hellenic in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; and P&O Cruises in Australia Each brand has a slightly different focus Each of the lines focuses on a different part of the world or offers a different class of cruise Different names allow for the association or branding of a particular line with a particular type of cruise For instance, Windstar focuses on the exotic locations and the sailing ship experience while Carnival focuses on more of a festive atmosphere on board ship – that is, fun times The corporation also operates riverboats on the Danube River and several tour companies Total revenues in fiscal 2006 were $11,839 million The occupancy percentage was 106% Notice that occupancy is greater than 100% How can one explain this? For Carnival, it means that capacity is defined as two persons per room, so when more than two persons occupy a room capacity utilization is greater than 100% 439 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com According to management’s estimate, capacity will increase 5.8% per year for the next three years Assuming that revenue increases in proportion to capacity, budgeted revenue for the next two years would be: 2007: 1.058 x 11,839 million = $12,526 million 2008: 1.058 x 12,526 million = $13,252 million Of course, with added revenue from additional cruise days there would be added costs If added cruise days were achieved by making better use of existing capacity, costs would probably not increase proportionately with the volume Some fixed costs would not be likely to change However, since the added volume requires adding capacity, costs would probably increase nearly proportionally to the increase in volume A few fixed costs, for example corporate headquarters costs, might not increase much, but even costs that are fixed for a given level of capacity will increase if capacity needs to be increased The prices for cruises of the same length to the same location are not all the same They differ according to when the cruise dates are – high season or low season – and also according to the level of capacity utilization that the particular cruise has achieved The firm’s goal is to have the maximum capacity utilization possible for each cruise If demand is high for a particular cruise, then the firm will be able to command a higher price and still fill the cabins Since much of the cost of the cruise is likely to be fixed in nature, the firm will incur the cost even if they don’t fill the cabins Thus, a price that covers variable cost and contributes to fixed costs will be preferred to an empty cabin Destinations or dates that are less popular are cheaper because once the company schedules the cruise, it is in its best interests to fill as many cabins as possible as long as the price is above the variable costs Last-minute deals can be especially cheap if a particular cruise looks like it is likely to have excess capacity 440 ... changed to the following: Inventory $ 434,000 Total assets 1,000,000 Accounts payable 489,000 Total liabilities and owners’ equities 1,000,000 Exhibit I BETTERBUY ELECTRONICS, INC Mall of America Store... Beginning Inventory plus Purchases equals Cost of Goods Sold plus Ending Inventory To compute required purchases, compute the inventory needed (Cost of Goods Sold plus Ending Inventory) and then... $36,000 30% 10,800 From October sales $30,000 60% x 99% 17,820 Total October collections $29,340 Schedule 2, Payments for Merchandise: September October Target ending inventory $ 9,000* $ 6,600*