CAD Packaged Foods Inc. $($CPI$)$ produces high$-$end brand name packaged foods under the label Friendly Dinners for the Canadian consumer retail market. Over the past year CPI has sold $226,000$ Friendly Dinner Packs. CPI currently sells its product over the internet either directly from its web site or on Amazon.com.

Quarterly Unit Sales $($Past Year$)$

Q$1$ Q$2$ Q$3$ Q$4$

$50,00040,00058,00078,000$

Management expects sales to grow in the coming year by $10\%.$ To support this sales$-$growth you have been asked to produce a cash budget for the upcoming fiscal year. The budget needs to provide management with seasonally adjusted$-$quarterly unit sales, as well as$,$ quarterly sales revenues, costs, profits $($losses$)$ assuming an average unit price of $$75$ for a box of $5$ Friendly Dinners.

The budget should assume an ending finished goods inventory holding policy of $5\%$ of the next quarter$$s demand. Based on a most recent inventory count, Quarter $1,$ opening inventory, will be $5,000$ dinners. Demand in Quarter $1$ of the following year should be assumed stable at $55,000$ Friendly Dinners. Given the high end nature of the CPI$$s flagship product, there are strict quality control procedures in place which result in $2\mathrm{.}50\%$ of completed Friendly Dinners being rejected.

Each Friendly Dinner requires $3$ lbs of direct materials, these include meat, veggies, potatoes and all of the fixings for a high quality Friendly Dinner. Direct materials cost $$8$ per lb$.$ Currently direct materials wastage is $10\%$ of direct materials used in the production process. While this is very disappointing to senior management they have agreed to continue with this assumed waste factor in the upcoming year. Management has also confirmed that opening and closing direct materials inventory for the upcoming year will be $50,000$ lbs$,$ and that $10\%$ of required direct materials needed for each upcoming quarter must be kept on$-$hand.

CPI employs $80$ full$-$time production employees that are paid an annual salary of $$35,000$ and are required to work $450$ hours per quarter. Approved overtime is paid at a rate of $$22\mathrm{.}50$ per hour.

Given the high$-$quality nature of the Friendly Dinner brand, production is highly labour intensive, taking $\mathrm{.}60$ direct labour hours per meal. In addition, each Friendly Dinner requires $\mathrm{.}25$ hours of machine time, mostly related to pre$-$cooking and freezing of the packaged meals. This equipment has a capacity of $2,000$ hours per quarter. Lease costs for this equipment are $$25,000$ per machine.

Other quarterly costs of production are as follows:

Other Annual Fixed Costs

Human Resources $$300,000$

Information Technology $$500,000$

Distribution $$300,000$

Marketing $$150,000$

Friendly Dinners are shipped within $24$ hours of order. All dinners are shipped in specially constructed shipping containers that keep the dinners at a constant temperature of $-180$ Celsius $(00$ F$)$ for up to $72$ hours. This adds an additional cost of $$29\mathrm{.}95$ per box.

The Task$($s$)$ at Hand

$1.$ Develop a seasonally adjusted quarterly cash budget for the upcoming year $($assume an income tax rate of $20\%).$

$2.$ Given your cash budget, what is CPI$$s break$-$even demand and sales for the upcoming year?

$3.$ Develop a cash management plan for the upcoming year.

a$.$ Will management need to draw down on its $$500,000$ operating line of credit? $($assume the operating line has an interest rate of $10\%$ per annum.$)$

b$.$ Should management implement a minimum $$200,000$ cash balance policy? What are the trade$-$offs of such a policy $($demonstrate your ideas$)?$

$4.$ Using the ideas of total quality management $($TQM$),$ and your cash budget, provide a review of what costs can be managed better in the coming year. Provide specific ideas on how costs could be better managed in the coming year. Be sure to review both the benefits and risks of your cost management ideas