The balance sheet of PoshEdd Company Ltd at 31 December 2022 is summarized below:

GHS 000

GHS 000

Non-current assets

700

Current assets

Inventory of finished goods

44.8

Debtors

200.0

Cash

157.6

402.4

Current liabilities

2.4

Net current assets

400

Capital employed

1,100

Following an advertising campaign around Christmas, the firm expects sales to rise in 2022 but it is not known precisely to what level. It is anticipated that 12,000 items will be sold in the year at an average price of GHS 100, though, with the uncertainty that exists over this figure, you have been asked to produce a flexible budget showing the profit if sales are 80%, 90%, 100%, 110% and 120% of 12,000. You have also been asked to produce a cash budget showing the balance at the end of each quarter of 2023 and a budgeted statement of financial position at 31/12/2023, both if the 12,000 sales figure is achieved.

You are told that:

a) The level of demand is expected to be constant during 2022 though the actual level achieved will not be confirmed until the end of the first quarter. Production will be of 1,000 items per month during the first quarter, production in the second quarter will be sufficient to bring the end of June stock levels to 2 months; and in the remaining two quarters, production will match demand.

b) Although it is intended to maintain the average sales price of GH 100 per item, if sales are to reach the 120% level, it is felt that a quantity discount of 10% will need to be given on 20% of sales made.

c) All sales are on credit, 50% of debtors pay two months after sale and 50% pay three months after sale. Sales in 2022 had been constant throughout the year.

d) Materials cost are GH 20 per item. In order to achieve this purchase price, stocks have to be bought in bulk on the first day of each quarter and payment made within thirty days. For orders in excess of GH50,000 this cost will fall by 5%.

e) Labor costs are based on piece work scales of GH3 per item, though the management of Eddposh Ltd have recently been reminded of a productivity bonus of 60p per item if monthly production from the workforce of 10 reaches 1,000 items. Labor costs are paid one month after they are incurred.

f) Overhead costs are partly fixed and partly variable. The variable element amounts to GH5 per item payable in the month incurred. The fixed element is expected to be GH500,000 of which GH100,000 is depreciation of existing non-current assets. Half of the balance is payable monthly, a quarter at the end of June and a quarter at the end of December. If sales reach 120% additional machinery costing GH240,000 will need to be purchased on 1/04/2023 and will be depreciated at 10%.

g) Operating stock represents 1,600 items at unit variable cost. Creditors are for wages.

h) Tax and interest charges can be ignored.