Accounting for Managers Question:

NewTown Ltd makes a range of products all of which follow a similar production process and have the same cost structure. The products are made in batches which started at the beginning of the month and are completed and taken into finished goods inventories at the end. There is no work in progress at the end of any month. The business is considering a change in its sales prices, volumes, and credit terms.

Current position

Sales revenues are RM300,000 a month and produce a contribution of RM0.40 per RM1 of sales revenue. Variable raw material costs account for RM0.20 per RM1 of sales revenue. Fixed costs are RM120,000 a month, of which RM30,000 is depreciation. The businesss only variable costs are production costs. Credit customers take one month to pay, trade payables for raw materials are paid one month after purchase and the other variable costs are paid during the month of production. At the end of each month, the business has sufficient raw material inventories to meet the following months production and enough finished inventories to meet the following months sales.

Possible future position

Production and sales volumes would be increased by 50%. To generate the increased demand, selling prices would be reduced by 10% and trade receivables would be allowed to pay two months after the sale. Apart from the increased trade receivables payment period, all working capital policies would remain the same as at present. The changes to sales volume, price, and payment period, if occur, would commence with sales made from 1 December this year, but to meet the businesss working capital policies, there would be effects on cash flows before that time. The businesss balance in bank on 1 October is expected to be RM70,000

Required:

Prepare NewTown Ltds cash budgets for each of the months of October, November, and December this year and January and February next year, assuming that the proposed sales expansion goes ahead. Show all relevant workings. Provide practical suggestions on the production and purchases.

Note: Ignore interest.