Q a new company, is being established to manufacture and sell an electronic tracking device: the Trackit. The owners are excited about the future profits that the business will generate. They have forecast that sales will grow to 2,600 Trackits per month within five months and will be at that level for the remainder of the first year.

The owners will invest a total of shs. 250,000 in cash on the first day of operations (that is the first day of Month 1). They will also transfer non-current assets into the company.

Extracts from the companys business plan are shown below.

Sales

The forecast sales for the first five months are:

Month	Trackits
1	1,000
2	1,500
3	2,000
4	2,400
5	2,600

The selling price has been set at shs. 140 per Trackit.

Sales receipts

Sales will be mainly through large retail outlets. The pattern for the receipt of payment is expected to be as follows:

Time of payment % of sales value

Immediately 15 *

One month later 25

Two months later 40

Three months later 15

Time of payment % of sales value

Immediately 15 *

One month later 25

Two months later 40

Three months later 15

The balance represents anticipated bad debts.

* A 4% discount will be given for immediate payment.

Production

The budget production volumes in units are:

Month 1		Month 2		Month 3		Month 4
1,450		1,650		2,120		2,460

Variable production cost

The budgeted variable production cost is shs. 90 per unit, comprising:

shs.

Direct materials 60

Direct wages 10

Variable production overheads 20

Total variable cost 90

Direct materials: Payment for purchases will be made in the month following receipt. There will be no opening inventory of materials in Month 1. It will be company policy to hold inventory at the end of each month equal to 20% at of the following months production requirements. The direct materials cost includes the cost of an essential component that will be bought in from a specialist manufacturer.

Direct wages will be paid in the month in which the production occurs.

Variable production overheads: 65% will be paid in the month in which production occurs and the remainder will be paid one month later.

Fixed overhead costs

Fixed overheads are estimated at shs. 840,000 per annum and are expected to be incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the month in which they are incurred and 15% in the following month. The balance represents depreciation of noncurrent assets.

Ignore VAT and Tax

Required

1. Prepare a cash budget for each of the first three months and for that three-month period in total.

(14 marks)

2. There is some uncertainty about the cost of the specialist component (this is

included in the direct material cost). It is thought that the cost of the component could range between shs. 32 and shs. 50 per Trackit. It is currently included in the cost estimates at shs. 40 per Trackit.

Calculate the budgeted total net cash flow for the three-month period in total if the cost of the component was

1. shs. 32
2. shs. 50

(6 marks)