Fun ЎЇNЎЇ Games Company

Fun ЎЇnЎЇ Games Company

Fun ÐŽ®nЎЇ Games Company was founded by Avery Rinehart to produce a novelty item marketed under the name ÐŽoPuzzler.ÐŽ± Each ÐŽoPuzzlerÐŽ± cost the company $14 to produce. In addition to these production costs that varied in direct proportion to volume (so-called variable costs), the company also incurred $4,000 monthly ÐŽobeing in businessÐŽ± costs (so-called fixed costs) irrespective of the monthЎЇs volume. The company sold its product for $22 each.

As of December 31, Rinehart had been producing ÐŽoPuzzlerÐŽ± for three months using rented facilities. The balance sheet on that date was as follows:

Balance Sheet

As of December 31

Assets

Cash $ 58,500

Accounts receivable 27,500

Inventory 14,000

$100,000

Equities

Common Stock $100,000

Retained earnings 0

$100,000

Rinehart was very pleased to be operating at a profit in such a short time. December sales had been 750 units, up from 500 in November, enough to report a profit for the month and to eliminate the deficit accumulated in October and November. Sales were expected to be 1,000 units in January, and RinehartЎЇs projections showed sales increases of 500 units per month after that. Thus, by May, monthly sales were expected to be 3,000 units. By September, that figure would be 5,000 units.

Rinehart was very conscious of developing good sales channel relationships in order to increase sales, so ÐŽoPuzzlerÐŽ± deliveries were always prompt. This required production schedules 30 days in advance of predicted sales. For example, Fun ÐŽ®nЎЇ Games had produced 1,000 ÐŽoPuzzlersÐŽ± in December for January sales, and would produce 1,500 in January for FebruaryЎЇs demand. The company billed its customers with stated terms of 30 days net, but did not strictly enforce this credit terms with the result that customers seemed to be taking an additional month to pay. All of the companyЎЇs costs were paid in cash in the month in which they were incurred.

RinehartЎЇs predictions came true. By March, sales had reached 2,000 ÐŽoPuzzlers,ÐŽ± and 2,500 units were produced in March for April sale. Total profit for the year by March 31 had reached $24,000. In order to get a respite from the increasingly hectic activities of running the business, in mid-April Rinehart went on a family vacation.

Within the week, the companyЎЇs bookkeeper called. Fun ÐŽ®nЎЇ GamesЎЇ bank balance was almost zero, so necessary materials could not be purchased. Unless Rinehart returned immediately to raise more cash, the entire operation would have to shut down within a few days.

Questions

1. Prepare monthly income statements, balance sheets, and cash budgets based on sales increases of 500 units per month and 30-day advance production for January through September. When will