Kwaysar Ltd sells television satellite dishes both to retail outlets and direct to the public. Its most recent statement of financial position is as follows:

Statement of financial position (balance sheet) as at 31 May 2008

£000 £000 Non-current assets Premises 350 Accumulated depreciation (60) 290 Fixtures and fittings 80 Accumulated depreciation (42) 38 328 Current assets Inventory at cost 44 Receivables 52 Cash at bank 120 216 Total assets 544 Equity

£1 ordinary shares 200 Retained earnings 252 452 Non-current liabilities Borrowings – loan 48 Current liabilities Trade payables 32 Accrued overheads 12 44 Total equity and liabilities 544 In the second half of the financial year to 31 May 2008, the business generated a profit of

£62,400 and sales of £525,000. It is believed that this level of performance will be repeated in the forthcoming six-month period provided the business does not implement any changes to its marketing strategy. The business, however, is determined to increase its market share and is considering the adoption of a new marketing strategy that has been developed by the marketing department. The main elements of the new strategy are as follows:

1 The selling price of each satellite dish will be reduced to £90. At present each dish is sold for

£120.

2 There will be an increase in the amount of advertising costs incurred by the business.

Advertising costs will increase from £6,500 per month to £12,000 per month.

3 Retail outlets will be allowed to pay for satellite dishes three months after delivery. At present, trade receivables are allowed one month’s credit. Those retail outlets that continue to pay within one month will, for future sales, be given a 2 per cent discount.

The marketing department believes that, by adopting the new strategy, sales in each of the first three months to retail outlets will rise to 1,000 units and sales to the public will rise to 300 units. Thereafter, sales each month will be 1,200 units and 400 units respectively.

Assuming the strategy is adopted, the following forecast information is available:

1 The purchase of satellite dishes will be made at the beginning of each month and will be sufficient to meet that month’s sales. Each satellite dish costs £50. Trade payables are paid one month after the month of purchase.

2 Depreciation will be charged on premises at 2 per cent per year on cost and for fixtures and fittings at 15 per cent per year on cost.

3 Motor vans costing £80,000 will be acquired and paid for immediately. These are required to implement the new strategy and will be depreciated at 30 per cent per year on cost.
4 Wages will be £18,000 per month and will be paid in the month in which they are incurred.
5 Advertising costs will be paid for in the month incurred.
6 Other overheads (excluding those mentioned above) will be £14,000 per month and will continue to be paid for one month after the month in which they are incurred.
7 The loan of £48,000 will be repaid in July 2008.
8 Sales direct to the public will continue to be paid for in cash. No credit will be allowed.
9 It is estimated that 50 per cent of retail sales will continue to be on one month’s credit and 50 per cent will be on three months’ credit.
Ignore taxation.
Required:
Assuming that the new marketing strategy is adopted:

(a) Prepare a projected income statement for the six-month period to 30 November 2008.
(A monthly breakdown of profit is not required.)

(b) Prepare a projected cash flow statement for the six-month period to 30 November 2008.
(A monthly breakdown of cash flows is not required.)

(c) Comment on the financial results of Kwaysar Ltd for the six-month period to 30 November 2008.