6.6 Daniel Chu Ltd, a new business, will start production on 1 April, but sales will not start until 1 May. Planned sales for the next nine months are as follows:

Sales Units May 500 June 600 July 700 August 800 September 900 October 900 November 900 December 800 January 700 The selling price of a unit will be a consistent £100 and all sales will be made on one month’s credit. It is planned that sufficient finished goods inventories for each month’s sales should be available at the end of the previous month.

Raw materials purchases will be such that there will be sufficient raw materials inventories available at the end of each month precisely to meet the following month’s planned production. This planned policy will operate from the end of April. Purchases of raw materials will be on one month’s credit. The cost of raw material is £40 a unit of finished product.

Required (working to the nearest £1,000):

(a) Prepare a cash budget for the six months ending 30 November which shows the cash balance at the end of each month.

(b) Prepare the inventories budget for the six months to 30 November which shows the inventories position at the end of each month.

(c) Prepare a budgeted income statement for the whole of the six-month period ending 30 November. (A monthly breakdown of profit is not required.)

(d) What problems is Newtake Records Ltd likely to face in the next six months? Can you suggest how the business might deal with these problems?