381ACC Question 3 Mortimer Mousetraps Ltd is a small company that manufactures mousetraps for sale to hardware retailers. The Finance Director of the company is currently considering the company's cash position for the next few months. The selling price of the mousetraps is 2.50 each, rising to 2.60 in August, 20% of customers pay on delivery, taking advantage of a 5% discount for immediate payment. 40% of customers pay in the month following delivery and 36% two months after delivery. The remaining credit sales result in bad debts. Expected sales volumes for the first five months of the financial year 20X1/X2 are given in the following table. Month June July August September October Sales volume 45,000 48,000 51,000 52,000 53,000 (units) Mortimer Mousetraps Ltd uses tanalised wood and metal wire to make its mousetraps, and expected purchases of each raw material are given in the following table: Month June July August September October Tanalised wood (m) 591 669 683 696 Metal wire (m) 14,625 15,600 16,575 16,900 17,225 Tanalised wood costs Mortimer Mousetraps Ltd 14 per m2 and the metal wire costs 1.60 per metre. The cost of both types of raw materials is expected to increase by 4% in July. Mortimer Mousetraps Ltd has negotiated credit terms with all its suppliers and pays 80% of the cost of tantalised wood on delivery and the remaining 20% one month later. For metal wire the company pays 70% of the cost on delivery and the remaining 30% one month later. Mortimer Mousetraps Ltd's other expenses and details of when they are paid are given in the table below: 630 month Each paid 35,000 per annum but will increase by 4% in Paid on the last day of each 3 x managers September month Each paid 25,000 per annum 22 x production but will increase by 5% in Paid on the last day of each staff September month Fixed manufacturing 45,000 per month including Paid on the last day of each expenses 15,000 depreciation Interest on a 500,000 Paid on the last day of each business loan 6% per annum month Payable quarterly in March, June, September and Utilities 1,000 per month December Payable half in August and half Advertising 800 per month in February The opening bank balance for August is expected to be 15,000 positive and Mortimer Mousetraps Ltd's current overdraft limit is 10,000. Page 6 Continued/... 381ACC Required a) Prepare Mortimer Mousetraps Ltd's monthly cash budget for the three-month period August to October 20X1 (work to the nearest ). (11 marks) b) Advise the management of the company on the company's cash flow performance over the period, and about measures that could be taken to improve the company's cash flow performance. (9 marks) (Total 20 marks)