Arcadia Ltd has only one product, a garden gnome, for which it plans to increase production and
Question:
Arcadia Ltd has only one product, a garden gnome, for which it plans to increase production and sales during the first half of next year. The plans for the next eight months are as follows:
The selling price for each gnome will be £10. The raw materials will cost £4 per gnome; wages and other variable costs are expected to be £3 per gnome.
Salaries and other fixed overheads are expected to amount to £1400 per month during November and December, to rise to £1600 per month from January to April (inclusive), and to increase to £2000 per month for May and June.
Sixty per cent of sales are made on a cash basis (paid on delivery). The remainder are sold on credit, debtors being expected to pay in full in the second month after the sale.
Payment is planned to be made for raw material purchases one month after delivery, and materials are expected to be held in stock for one month before they are used in production.
Wages and other variable costs are expected to be paid during the month of production. Salaries and other fixed overheads are planned to be paid 80 per cent in the month in which they are incurred and 20 per cent in the following month.
To promote the expanded sales volume, an advertising campaign is to be undertaken.
This will involve payments to the advertising agency of £1000 in January and £1500 in April.
A new machine, to help cope with the increased production, has been ordered, and it should be delivered in February. The agreement is to pay the £6000 for the machine in three equal instalments of £2000 each in March, April and May.
Arcadia Ltd intends to pay a dividend of £600 to its shareholders in April.
It expects to have a bank current account balance (in funds) of £7500 on 1 January.
Produce a cash budget for the first six months of next year, showing the net cash position at the end of each month.
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