At the end of April19-8, CD Ltd, which supplies a component to leading manufacturers in a segment of the engineering industry, fears that its largest customer EF ltd is likely to be subject to a strike. This strike is expected to last from 1 May-31 July 19X8, during which time EF Ltd will be unable to purchase any components from CD Ltd.

CD Ltd is considering two possible plans for dealing with this situation:

PLANA To continue producing at its normal (effectively maximum) level of $1 00000 worth per month of the component, putting the unsold production into stock If this is done, it will have enough stock to enable it to meet the higher demand from EF Ltd during August PLAN B To produce atthe normal level during May, to stop production during June and July, and to re-start at the normal level in August If this is done, it will be able to meet the higher level of demand from EF Ltd during August only The following additional information is available:

1 . Profit and loss statements for the year 31 January 19X8 and the 3 months to 30 April 19X8

(Appendix 1 )

2. Balance sheets as at 31 January 19X8 and 30 April 19X8 (Appendix 2)

3. Budgeted monthly income statement for period May-August, if normal production is maintained

(Appendix 3)

4. It is the company's practice to absorb fixed production costs into finished goods If, however, no goods are produced, fixed production costs for that month would be charged to profit and loss account Selling and administratior.l costs can be regarded as fixed and charged to profit and loss account5. Direct wages are paid in the months in which they are incurred Overhead is paid 1 month after it is incurred Cost Accounting 6. Assume that selling prices remain constant over the period, and that tax is chargeable at 50 per cent REQUIRED

(a) Prepare a cash forecast for the total 4 month period 1 May 19X8-31 August 19X8 for the company, if:

(i) plan A were adopted

(ii) plan B were adopted

(b) Prepare a balance sheet for the company as at 31 August 19X8, assuming that plan B were adopted

(c) Briefly identify the factors that are likely to influence the company's decision in favour of plan A or plan B ICMA. PS, Part I, Management Accounting 1, May 1978.

APPENDIX 1 Sales Cost of sales:

Direct materials Direct wages Other expense Selling and administration expense Total Profit before tax PROFIT AND LOSS STATEMENTS Year ended 31 Jan 19X8

$000 $000 1058.4 236.7 205.2 158.1 600.0 252.4 852.4

$206.0 3 months ended 30 Apr 19X8

$000 $000 297.1 66.1 61.8 38.0 165.9 69.4 235.3

$61.8 BALANCE SHEETS As at As on 31 Jan 19X8 30 Apr 19X8 $000 $000 $000 Fixed assets:
Plant and machinery 637.3 637.3 Less: Accumulated depreciation 140.1 158.1 497.2 Current assets:
Stocks:
Raw materials 19.2 22.0 Finished goods 19.3 21.4 38.5 43.4 Debtors 92.1 106.2 Cash 111.2 99.2 241.8 739.0 Issued capital 450.0 450.0 Profit and loss account 140.6 158.7 590.6 Current liabilities:
Trade creditors 62.2 64.4 Other current liabilities 30.3 30.0 Tax due 55.9 24.9 148.4 739.0 APPENDIX 3 BUDGETED MONTHLY INCOME STATEMENT MAY-AUGUST 19X8 IF NORMAL PRODUCTION MAINTAINED 217 $000 479.2 248.8 728.0 608.7 119.3 728.0 $000 $000 Sales Cost of sales:
Direct materials Direct wages Fixed production cost Selling and administration cost"
Total Profit before tax a includes depreciation $6000 100 22 20 12 54 24 78 22