Jill and Irene McKenna have designed innovative cushioning material for running

shoes and have established a company, LongRun Ltd, to commence production of

the footwear. The innovative design of the shoes (runners) reduces the possibility of

injury. They have asked for your assistance in preparing a cash budget for the first

four months of operations, from May to August. The following information has been

obtained from a planning meeting with Jill and Irene:

1. The runners are produced for men and women. Details of selling prices and

projected sales revenue for the four month period are shown below.

May June July August Total

Sales units Mens runners

(pairs) 2,000 2,400 3,000 3,200 10,600

Selling price 80 80 80 80 80

Revenue 160,000 192,000 240,000 256,000 848,000

Sales units Womens runners

(pairs) 1,400 1,800 2,400 3,000 8,600

Selling price 70 70 70 70 70

Revenue 98,000 126,000 168,000 210,000 602,000

Total Revenue 258,000 318,000 408,000 466,000 1,450,000

2. It is expected that all sales will be on credit to department stores and sports

shops. It is estimated that 30% of customers will pay within one month while

the remaining customers will take two months to pay.

3. The company requires a closing inventory of 300 pairs of womens runners

and 200 pairs of mens runners at the end of each month. As the company is

just commencing operations there are no opening inventories of runners.

4. The runners comprise a recycled nylon mesh material, the innovative

cushioned (pre-cut) soles. The quantities and price of the nylon mesh are as

follows.

Nylon

Mesh

Price per meter 10

Quantity required in meters

Men's 0.5

Women's 0.4

A pair of rubbers soles for the mens runners costs 7.20 and for womens

runners 5.40. Due to space constraints at its premises the company cannot

hold any stocks of raw materials.

5. The labour rate is 14 per hour and it takes 0.25 hours to make a pair of

mens runners and 0.2 hours to make a pair of womens runners. /overUCD Spring, 22/23 Page 9 of 12 ACC20020

Question 2 (continued)

6. Both the nylon mesh and the cushioned soles are supplied by one company.

This supplier requires that 50% of the purchase total is paid when the order is

placed, and allows one months credit for the remaining amount.

7. Labour costs are paid in the month incurred.

8. Each pair of runners produced will be packed in a biodegradable cardboard

box using environmentally friendly packaging costing, in total, 1.85 per box.

The company has agreed one months credit for packaging purchases.

9. The company has signed a rental agreement for the production facility. The

total factory rent for the year will be 360,000, which will be paid in equal

monthly instalments. A security deposit amounting to 25,000 must also be

paid in May.

10. Other operational costs including power, insurance, and administration

expenses, are expected to be 78,000 for the year paid equally in each

month.

11. To promote the runners an advertising campaign for social media, television,

radio, and print has been organised. The cost of the campaign is 33,600 for

the four-month period payable in equal instalments from May. A commission

of 5% of projected sales revenue is also payable one month in arrears.

12. Jill and Irene will introduce capital of 50,000 at the commencement of the

companys operations.

REQUIREMENT:

Part A

Prepare the following budgets for LongRun Ltd on a monthly basis, for the four-

month period commencing 1 May:

1. Production budget (in units).

(5 marks)

2. Materials purchase budget (in units and s) for both of the raw materials

(mesh and cushioned soles).

(6 marks)

3. Cash Budget.

(20 marks)

Part B

Based on your work in Part A briefly discuss any issues that should be drawn to the

attention of Jill and Irene.