Illuminate Ltd. is a company that produces various coloured lights that is distributed through gift shops located in major shopping centres across Fiji. One of its best sellers is the Aura coloured lights. In 2021, the company projects selling 100 000 of Aura lights in April, 120 000 in May, and 140 000 in June. The Aura light sells for $20 and has the following standard unit production costs at a monthly volume of 100 000 units:

Raw materials $5.00

Direct labour 8.00

Variable overhead 2.00

Fixed overhead 0.50

The budgeted fixed production costs include non-cash expenses of $20 000. Under-or overapplied overhead is closed to the Cost of Goods Sold each month. Other monthly expenses include distribution expenses of 10 percent of sales and administrative expenses of $5 000.

The Company currently has 40 000 Aura lights on hand and sufficient raw materials to produce 100 000 additional units. The company desires to have sufficient quantities of the finished product on hand at the end of each month to supply 50 percent of the following months sales and sufficient raw materials to supply 80 percent of the following months production.

The Company believes in cash on the barrel head. It pays all debts immediately and it does not sell on account. The current March 31 cash balance is $10 000.

REQUIRED

[Note: Each budget must have a proper title/heading]

(a). Prepare a production budget (in units) for April and May. (7 marks)

(b). Prepare a purchases budget for April. (5 marks)

(c). Prepare a Cash budget for April. (13 marks)

(d). Write a memo to the senior management on Illuminates cash position in April and give your recommendations (use proper memo format). (5 marks)

QUESTION 3: Capital Investment

Total marks for this question: 20 marks

[Suggested time: 36 minutes]

The Breakwater caf is a common eatery that serves, breakfast, lunch and brunch on Mendana Avenue in the centre of Honiara. Due to its popularity, it is considering expanding its outlet. The owner has identified the following alternatives:

• Construct a new restaurant in the newly constructed AJ City mall in East Honiara
• Buy and renovate an old building towards the West end of Honiara for the new restaurant.

The projected cash flows and annual profit from these two alternatives are shown below. The owner of the restaurant uses a 10 percent discount rate.

	Cash outflow	Annual profit
Investment proposal	Year 0	Years 1 to 10	Years 11 to 20
AJ City restaurant	$450 000	$32 500	$32 500
West-end restaurant	250 000	$20,000	-

The Breakwater caf uses straight-line depreciation method. Each of the investment proposals will have zero residual value at the end of the useful life.

REQUIRED

1. Calculate the net present value of each alternative restaurant site.

(6 marks)

2. The owner will consider projects only if they have a payback period of less than six years. She also favours projects that exhibit an accounting rate of return of at least 8 per cent, and bases a projects accounting rate of return on the initial investment in the project.

1. Calculate the payback period for each of the proposed restaurant sites. (3 marks)

2. Calculate the accounting rate of return for each proposed site.

(3 marks)

2. 3. If the owner of the restaurant sticks to her criteria, which site will she choose? Justify your choice. (4 marks)
3. With reference to the owners current criteria for choosing capital investment proposals, what advice would you give her when assessing capital projects. (4 marks)