Study the scenario below and answer the questions that follow:

Peter company

Peter company makes a range of products all of which follow a similar production process and have the same cost structure. The products are made in batches that are started at the beginning of the month and are completed and taken into finished goods inventories at the end. There is no work in progress at the end of any month. The business is considering a change in its sales prices, volumes, and credit terms.

Current position

Sales revenues are $0.3 million a month and produce a contribution of 40p per $1 of sales revenue. Variable raw material costs account for 20p per $1 of sales revenue. Fixed costs are $120,000 a month, of which $30,000 is depreciation. The businesss only variable costs are production costs.

Credit customers take one month to pay, trade payables for raw materials are paid one month after purchase and the other variable costs are paid during the month of production. At the end of each month, the business has sufficient raw material inventories to meet the following months production and enough finished inventories to meet the following months sales.

Possible future position

Production and sales volumes would be increased by 50%. To generate the increased demand, selling prices would be reduced by 10% and trade receivables would be allowed to pay two months after the sale. Since neither the usage, nor the cost per product of raw materials and other variable costs would be affected by the proposed expansion, the contribution per $1 of sales revenue would fall to 30p. Apart from the increased trade receivables payment period, all working capital policies would remain the same as at present. The changes to sales volume, price, and payment period, were they to occur, would commence with sales made from 1 December this year, but to meet the businesss working capital policies, there would be effects on cash flows before that time. The businesss balance in bank on 1 October is expected to be $70,000.

Required: Prepare peter company.s cash budgets for October, November, and December 2020 as well as January and February 2021, on the assumption that the proposed expansion of sales goes ahead.

Cash budget for five months ending February 2021

	Oct	Nov	Dec	Jan	Feb
	$000	$000	$000	$000	$000
Receipts
Trade receivables -
Payments
Trade payables
Other variable costs
Fixed costs (excl. dep)
Surplus/Deficit for the month
Cash balance

Workings