QUESTION 3 (CLO 3)

Orchid Limited make a single product, whose unit budget details are as follows:

	$	$
Selling price		500
Less: Costs:
Direct material	150
Direct labour	100
Direct production expenses	90
Variable selling expenses	80	(420)
Contribution		80

Additional information:

1. Unit sales are expected to be:

June	July	August	September	October
11,000	9.000	5,000	7,000	10,000

2. Credit sales will account for 70% of total sales. Debtors are expected to pay in the same month following sales for which there will be a cash discount of 5%.

3. Inventory levels will be arranged so that the production in one month will meet the next months sales demand.

4. The purchases of direct materials is one month which will just meet the next months production requirements.

5. Suppliers of direct materials will be paid in the month following purchase.

6. Labour costs will be paid in the month in which they are incurred. All other expenses will be paid in the month following that in which they are incurred.

7. Fixed expenses are $25,000 per month and include $2,000 for depreciation.

8. The bank balance at 1 July 2020 is $41,000 favourable to the business.

Required:

Using the information above:

a) PROPOSE a cash budget for Orchid Limited for the three month period ending on 30 September 2020 showing the balance of cash at the end of each month.

b) Based on the above cash budget information, PROVIDE suggestions how you will manage the cash flow to operate Orchid Limited effectively.