A company is to carry out a major modernization of its factory commencing in two weeks, time. During the modernization, which is expected to take four weeks to complete, no production of the company$$s single product will be possible.

The following additional information is available:

Sales$/$Debtors: Demand for the product at $100$ per unit is expected to continue at $800$ units per week, the level of sales achieved for the last four weeks, for one further week. It is then expected to reduce to $700$ units per week for three weeks, before rising to a level of $900$ units per week where it is expected to remain for several weeks. All sales are on credit, $50$ per cent being received in cash in the week following the week of sale and $50$ per cent in the week after that.

Production$/$Finished goods stock $($inventories$)$: Production will be at a level of $1,200$ units per week for the next two weeks. Finished goods stock is $2,800$ units at the beginning of week $1$

Raw material stock: Raw material stock is $36,000$ at the beginning of week $1.$ This will be increased by the end of week $1$ to $40,000$ and reduced to $10,000$ by the end of week $2.$

Costs

Cost information

$($ per unit$)$

Variable:

Raw material

$35$

Direct labour

$20$

Overhead

$10$

Fixed:

Overhead

$25$

Fixed overheads have been apportioned to units on the basis of the normal output level of $800$ units per week and include depreciation of $4,000$ per week.

In addition to the above unit costs, overtime premiums of $5,000$ per week will be incurred in weeks $1$ and $2.$ During the modernization variable costs will be avoided, apart from direct labour which will be incurred at the level equivalent to $800$ units production per week. Outlays on fixed overheads will be reduced by $4,000$ per week.

Payments: Creditors for raw materials, which stand at $27,000$ at the beginning of week $1,$ are paid in the week following purchase. All other payments are made in the week in which the liability is incurred.

Liquidity: The company has a bank overdraft balance of $39,000$ at the beginning of week $1$ and an overdraft limit of $50,000.$

The company is anxious to establish the liquidity situation over the modernization period, excluding the requirements for finance for the modernization itself.

Required:

$($a$)$ Prepare a weekly cash budget covering the six$-$week period up to the planned completion of the modernization. $(20$ marks$)$

$($b$)$ Comment briefly on any matters concerning the liquidity situation that you feel should be drawn to the attention of management $(10$ marks$)$