Fred and Sally own a profitable business that deals in windsurfing equipment. They are the only UK

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Fred and Sally own a profitable business that deals in windsurfing equipment. They are the only UK agents to impor t ‘Dr yline’ sails from Germany, and in addition to this they sell a variety of boards and miscellaneous equipment that they buy from other dealers in the UK.

Two years ago they diversified into custom-made boards built to individual customer requirements, each of which was supplied with a ‘Dr yline’ sail. In order to build the boards they have had to take over larger premises, which consist of a shop front with a workshop at the rear, and employ two members of staff to help.

Demand is seasonal and Fred and Sally find that there is insufficient work during the winter months to pay rent for the increased accommodation and also wages to the extra two members of staff. The four of them could spend October to March in Lanzarote as windsur f instructors and close the UK operation down in this period. If they did, however, they would lose the ‘Dr yline’ agency, as Dr yline insists on a retail outlet in the UK for 12 months of the year. Dr yline sails constitute 40% of their turnover and carr y a 50% mark-up.

Trading has been static and the pattern is expected to continue as follows for 1 April 20X5 to 31 March 20X6:
Sales of boards and equipment (non-custom-built) with Dr yline agency: 1 April–30 September £120,000; of this 30% was paid by credit card, which involved one month’s delay in receiving cash and 4% deduction at source.
Sixty custom-built boards 1 April–30 September £60,000; of this 15% of the sales price was for the sail (a ‘Dr yline’ 6 m2 sail costs Fred and Sally £100; the average price for a sail of the same size and quality is £150 (cost to them)).
Purchasers of custom-built boards take an average of two months to pay and none pays by credit card.
Sales 1 October–31 March of boards and equipment (non-custom-built) £12,000, 30% by credit card as above.
Six custom-built boards were sold for a total of £6,000 and customers took an unexplainable average of three months to pay in the winter.
Purchases were made monthly and paid for two months in arrears.
The average mark-up on goods for resale excluding ‘Dr yline’ sails was 25%. If they lose the agency, they expect that they will continue to sell the same number of sails, but at their average mark-up of 25%. The variable material cost of each custom-made board (excluding the sail) was £500.
Other costs were:
Wages to employees £6,000 p.a. each (gross including insurance).
Rent for premises £6,000 p.a. (six-monthly renewable lease) payable on the first day of each month.
Other miscellaneous costs:
1 April–30 September £3,000 1 October–31 March £900.
Bank balance on 1 April was £100.
Salar y earnable over whole period in Lanzarote:
Fred and Sally £1,500 each  living accommodation Two employees £1,500 each  living accommodation All costs and income accruing evenly over time.
Required:
(i) Prepare a cash budget for 1 April 20X5 to 31 March 20X6 assuming that:

(a) Fred and Sally close the business in the winter months.

(b) They stay open all year.
(ii) What additional information would you require before you advised Fred and Sally of the best course of action to take?

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Financial Accounting And Reporting

ISBN: 9780273712312

12th Edition

Authors: Barry Elliott, Jamie Elliott

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