Your friend is proposing to make a bid for a manufacturing business that has come onto the market. The business makes white plastic patio chairs. The purchase price for this business is £240,000. This purchase price is made up of plant, equipment and fittings (£180,000) with a useful life of five years, an inventory of raw materials (£20,000) and finished goods (£40,000). A delivery van will be purchased for £24,000 as soon as the business purchase is completed. The delivery van will be paid for in full in the second month of operations.

The following plans have been made for the business following purchase:

(a) Sales (before discounts) of plastic patio chairs, at a mark up of 60% on production cost (see(b) below), will be:

30% of sales will be for cash. The remaining sales will be on credit with 60% of credit sales being paid in the following month and the remaining 40% paying what is owed two months after the month of sale. A discount of 10% will be given to selected credit customers, who represent 25% of gross sales.

(b) Production cost is estimated at £5.00 per unit. The estimated production cost is made up of:

• Raw materials: £4.00

• Direct labour: £1.00

Production will be arranged so that closing inventory of finished goods at the end of every month is sufficient to meet 60% of sales requirements in the following month. The valuation of finished goods purchased with the business is based upon the planned production cost per unit given in (a) above.

(c) The single raw material used in production will be purchased so that raw material inventory at the end of each month is sufficient to meet half of the following month’s production requirements. Raw material inventory acquired on purchase of the business is valued at the planned cost per unit as given in (b). Raw materials will be purchased on one month’s credit.

(d) Costs of direct labour will be paid for as they are incurred in production.

(e) Fixed overheads are as follows: annual rent: £21,000, annual business rates: £8,100, annual heating and lighting: £7,500 and annual insurance: £1,500. Rent is payable quarterly in advance from 1 January. The business rates bill for January to March has been estimated at £1,800 and will be payable on 15 February while the rates bill from April to September has been estimated at £4,200 and will be payable by monthly instalments from 1 April. Heating and lighting will be payable quarterly in arrears at the end of each three-month period. Annual insurance will be payable on 1 January.

(f) Selling and administration overheads are all fixed and will be £114,000 in the first year. These overheads include depreciation of the delivery van at 25% per annum on a straight line basis.

(g) Selling and administration overheads will be the same each month and will be paid in the month in which they are incurred.

Required

Prepare a monthly cash budget and a budgeted monthly statement of profit or loss for the first six months of operations together with a budgeted statement of financial position at the end of June. As part of your budget, you should also produce a monthly production budget to calculate raw material purchases and a monthly sales budget to calculate both monthly sales and monthly cash receipts from sales.

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January February March April 12,000 Month Planned sales (units) 10,000 May June July 14,000 20,000 24,000 22,000 18,000