Dyer Ltd manufactures a variety of products using a standardized process which takes one month to complete. Each production batch is started at the beginning of a month and is transferred to finished goods at the beginning of the next month. The cost structure, based on current selling price, is

Activity levels are constant throughout the year and annual sales, all of which are made on credit, are £2.4 million. Dyer is now planning to increase sales volume by 50% and unit sales price by 10%. Such expansion would not alter the fixed costs of £50000 per month, which includes monthly depreciation of plant of £10 000.
Similarly raw material and other variable costs per unit will not alter as a result of the price rise.

In order to facilitate the envisaged increases several changes would be required in the long term. The relevant points are:
(i) The average credit period allowed to customers will increase to 70 days.
(ii) Suppliers will continue to be paid on strictly monthly terms.
(iii) Raw material stocks held will continue to be sufficient for one month's production.
(iv) Stocks of finished goods held will increase to one month's output or sales volume.
(v) There will be no change in the production period and 'other variable costs' will continue to be paid for in the month of production.
(vi) The current end-of-month working capital position is:

Compliance with the long-term changes required by the expansion will be spread over several months. The relevant points concerning the transitional arrangements are:
(i) The cash balance anticipated for the end of May is £80000.
(ii) Up to and including June all sales will be made on one month's credit. From July all sales will be on the transitional credit terms which will mean 60% of sales will take 2 month's credit 40% of sales will take 3 month's credit.
(iii) Sales price increase will occur with effect from August's sales.
(iv) Production will increase by 50% with effect from July's production. Raw material purchases made in June will reflect this.
(v) Sales volume will increase by 50% from October's sales.
Required:

(a) Show the long-term increase in annual profit and long-term working capital requirements as a result of the plans for expansion and a price increase. (Costs of financing the extra working capital requirements may be ignored.)
(6 marks)

(b) Produce a monthly cash forecast for June to December, the first seven months of the transitional period. (10 marks)

(c) Using your findings from

(a) and

(b) above make brief comments to the management of Dyer Ltd on the major factors concerning the financial aspects of the expansion which should be brought to their attention. (4 marks)
(Total 20 marks)
Assume that there are 360 days in a year and each month contains 30 days.

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Sales price Variable costs: Raw materials Other variable costs Total variable cost - used for stock valuation Contribution 1990 (%) (%) 100 40 940 30 70 30