Question
Global Antibiotics Limited (GAL) manufactures antibiotics for medical facilities and pharmacies around the world. In the past few years, the company has been struggling to
Global Antibiotics Limited (GAL) manufactures antibiotics for medical facilities and pharmacies around the world. In the past few years, the company has been struggling to survive in a highly competitive market. Andrew Jameson was employed as operations director at the beginning of January 2023, and he has discovered that the current manufacturing system is outdated, requiring a complete over haul of the manufacturing plant to turn around fortunes of the company. GALs board of directors have concluded that they would have to take Andrew at his word to make use of the latest technology to become more competitive. They appointed a renowned marketing company to help to promote the antibiotics, given the expected cost advantage that could give rise to more competitive pricing structure. The marketing costs will be 1,200,000, payable over 3 months in equal installments commencing in July 2023.
Being a medical product that is distributed globally and administrated to billions of people, quality is of cardinal importance to customers. Latest technological advancements have seen the development of follmixing and packing machines capable of operating at very high speeds and equipped with artificial intelligence monitor and adjust the manufacturing process to meet the exacting standards required in the pharmaceutical industry. Machines of the nature cost 800 million and can produce up to 200 million capsules (doses) per month. These machines can be leased over 5 years at a premium of 10% per annum on the purchase price. One such machine is available and could be installed at the beginning of June 2023. However, the company has decided to purchase the machine and to raise loan for 500 million with the bank at 5% per annum for 3 years to pay for it. The interest payments commence in the month of July 2023. If the company changed its mind and decided to lease machine instead, then the bank will not advance 500 million to the company because the company would be considered to have debt comments beyond their ability to service the debt. Current demand in the market place indicates that a price of 1.10 per dose is achievable. The existing staff are highly trained and capable of operating these new machines after further training cost 90,000 in the month of June 2023. Payment for this training is to be made in the month following the month of delivery of the training. Once installed, the new machines will require ongoing set-up and maintenance costs of 650,000 per month which is outsourced to a specialist maintenance company. These setup costs are paid one month in arrears. All GAL employees are full time employed on salaries and are included in the manufacturing overhead of 600,000 per month. These monthly costs are payable in the month of production. Production take place in the month prior to the month of sale. Material costs, including packaging, amount to 5.20 per pack of 21 doses and is purchased one month prior to production and paid for one month after purchase. Variable costs for delivery to clients are 450 per crate of 50,000 packs of 21 doses and are paid one month after the month of sale and delivery. The bank account for the project expected to have a balance of 250,000,000 at the beginning of July 2023. Production will be ramped up monthly during 2023 to serve their customers as follows:
June July August September 140,000,000 160,000,000 190,000,000 190,000,000 doses doses doses doses
For September onwards, production is expected to remain at 190,000,000 doses per month for the remaining life of the lease of the machine. 50% of customers pay one month after invoice and the reminder pay in two months. No bad debts are expected
Required: a part) Prepare the cash budget for the antibiotic product for the third quarter (July- September) of 2023 based upon the management decision to part-fund the purchase of the machine using a bank loan. (20 marks). B part) What would the situation be if the company were to lease the machine? (7marks) C part) Assuming that the cash balance is insufficient to fund the project startup working capital and that, by end July there is a negative balance in the closing balance of the cash budget, what actions could GAL take to remedy the situation? Identify three different actions that could see the cash balance for July and August turned positive. (3 marks). Part d) Explain the role of Standard Costing in a manufacturing setting. (10marks)
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