Bridget started the business of Barking Mad who specialise in making healthy, preservative free dog treats. Bridget makes and sells the treats at weekend markets from a caravan which she converted to include cooking facilities when she first started the business. Bridget stores the caravan at her house and manages the business from her home office. In the last 6 months, Barking Mad, have extended their sales through selling online. Bridget estimates approximately 20% of Barking Mads current sales are online and this continues to grow. Current average total sales are 140 packets per week (which includes the online and weekend market sales).

Bridget estimates that she can make 190 packets of treats per week given the time and resources she has available. For all calculations assume 4 weeks per month.

QUESTION ONE

a, The selling price for one packet of dog treats from Barking Mad is $4 and the variable costs of ingredients and packaging are $1.85 per packet.

Fixed costs include expenses such as interest on loan, advertising and insurance. These total $846 per month. Calculate the breakeven number of packets for Barking Mad

b, Bridget would like to take drawings of $120 per week from Barking Mad.

Calculate the minimum number of packets of dog treats she would need to sell per week to achieve this without dropping below break even.

c, The online sales are continuing to grow and over the next month total sales are expected to reach 158 packets per week.

1. Calculate the margin of safety in terms of packets per week for Barking Mad assuming the drawings of $120 per week are treated as a fixed cost.

2, Based on this information, justify whether it is reasonable for Bridget to think she can take the $120 drawings per week.

Justify your answer using the margin of safety calculation to support your answer.

d, Bridget is looking at more sustainable practices for Barking Mad and is considering using a biodegradable package for packaging the dog treats. There is a local supplier who is offering her a very competitive price for these.

1. Explain why this packaging decision is a routine decision for Barking Mad.

Alternatively, Bridget could invest in her own equipment for $10 000 that would produce biodegradable packaging herself.

2. Justify why this decision would be a strategic decision for Barking Mad.

QUESTION TWO

Barking Mad has had an offer to lease some space at a permanent market which is open 7 days a week, including a late night on a Friday. The lease would cost $110 per week and if she took up the lease she would need to commit for at least one year, starting in January 2022. If she takes on the lease, Bridget will need to work 4 days at the permanent market as well as at least one weekend day at the mobile markets. As a result, she will need to give up her part time dog walking job which she really enjoys as it gives her time to exercise. She currently works 12 hours per week and earns $20 per hour after tax. She estimates she could produce 300 packets of treats per week if she is not doing the dog walking.

Bridget would need to employ a part time worker to work the rest of the time at the permanent market at a fixed cost of $290 per week. Bridget estimates that she would sell 120 packets per week at the permanent market in addition to her online and mobile market sales. She thinks she will be able to manage to make the extra treats herself.

a,From the data below, and the information above, complete the Cash Budget for Barking Mad for the three months ending January 2022.

Estimated monthly sales for Barking Mad (number of packets)
November 2021	December 2021	January 2022
672	700	1 120

Estimated monthly supplies purchased for Barking Mad Paid in the month following sale
October 2021	November 2021	December 2021	January 2022
$576	$596	$952	$1 000

• The loan of $50 000 incurs interest of 6% pa paid monthly. At the moment, it is interest only.

• Packaging is purchased in bulk every second month and costs $600 each time, the next payment is due in December.

• Bridget plans to take drawings of $120 per week, excluding December as she knows there is considerable expense in setting up the new market location.

• Vehicle expenses are $105 per week which includes $15 depreciation

• Annual advertising of $600 is paid quarterly and the next payment is due in November

• Other expenses total $420 per month

Assuming Barking Mad takes on the new lease from January they will incur the following costs:

• Wages $290 per week

• Lease cost $110 per week

• Fit out of the new market is $2 000 to be paid in December prior to opening.

• Capital contribution by Bridget of $500 in December.

• Bank balance as at 1 November 2021 is $480

Barking Mad

Cash Budget for the three months ending January 2022

	November	December	January
Receipts
Cash sales
Cash from debtors
Less Payments
purchase
Wages
Other cash expenses
Provisional tax
Add: Opening bank balance

2. Justify the importance of the Cash Budget in decision making for Barking Mad with respect to whether they should take on the new lease.

Include in your answer:

• an explanation of why a Cash Budget is an essential tool for Barking Mad

• the impact on Barking Mad of taking on the new lease

• any limitations of the Cash Budget with respect to decision making.

QUESTION THREE

Bridget is seeking advice on whether to take on the new lease or not. She is excited about the opportunity to develop and grow Barking Mad but is cautious with respect to the financial risk she would be taking on.

In addition to the information provided in Questions One and Two, Bridget knows that the permanent market has a very good reputation and currently no one else is selling dog treats. She also knows the bank has agreed that she could extend her business bank overdraft to $2 000 if she needs to.

Use information from your comments and calculations for Question One and Question Two, for your answer to this question.

Recommend whether Bridget should:

1. Continue to operate from the mobile caravan at different markets

OR

2. Expand Barking Mad to include a site at a permanent market throughout the week as well.

You should provide detailed and justified reasons for your recommendation. Your report should consist of:

• an introduction that includes a clear statement of your recommendation

• a main body (with sub-headings if appropriate) consisting of reasons explaining your recommendation

• a justified conclusion.

Your report should expand on the resource information, and must include:

• relevant calculations from Questions One and Two, and any other calculations you consider important in helping Bridget understand the key issues in making this decision

• both financial and non-financial information.

The following Planning Template is provided for you to use to develop ideas for your report.

Recommendation:
Financial considerations	Non-financial considerations