A company is to carry out a major modernization of its factory commencing in two weeks time. During the modernization, which is expected to take four weeks to complete, no production of the company's single product will be possible.
The following additional information is available:
(i) Sales/Debtors: Demand for the product at £100 per unit is expected to continue at 800 units per week, the level of sales achieved for the last four weeks, for one further week. It is then expected to reduce to 700 units per week for three weeks, before rising to a level of 900 units per week where it is expected to remain for several weeks. All sales are on credit, 50 per cent being received in cash in the week following the week of sale and 50 per cent in the week after that.
(ii) Production/Finished goods stock: Production will be at a level of 1200 units per week for the next two weeks. Finished goods stock is 2800 units at the beginning of week 1.
(iii) Raw material stock: Raw material stock is £36 000 at the beginning of week 1. This will be increased by the end of week 1 to £40 000 and reduced to £10 000 by the end of
week 2.
(iv)Costs
(£ per unit)
Variable:
Raw material 35
Direct labour 20
Overhead 10
Fixed:
Overhead 25
Fixed overheads have been apportioned to units on the basis of the normal output level of 800 units per week and include depreciation of £4000 per week.
In addition to the above unit costs, overtime premiums of £5000 per week will be incurred in weeks 1 and 2. During the modernization variable costs will be avoided, apart from direct labour which will be incurred at the level equivalent to 800 units production per week. Outlays on fixed overheads will be reduced by £4000 per week.
(v) Payments: Creditors for raw materials, which stand at £27 000 at the beginning of week 1, are paid in the week following purchase. All other payments are made in the week in which the liability is incurred.
(vi) Liquidity: The company has a bank overdraft balance of £39000 at the beginning of week 1 and an overdraft limit of £50000. The company is anxious to establish the liquidity situation over the modernization period, excluding the requirements for finance for the modernization itself.
(a) Prepare a weekly cash budget covering the six-week period up to the planned completion of the modernization.
(b) Comment briefly upon any matters concerning the liquidity situation which you feel should be drawn to the attention of management.