Toppstarr Ltd is bidding for a contract to supply an item of merchandise to Walljam for sale in their new outlet at Westfield White City. Toppstarr plan to set up a division to manufacture this product. The product will be made and sold in boxes of 10 items and all costs and revenues are per box. In the first year they expect to sell 25,000 boxes at 80 each.

Part 1

Manufacturing costs will be:

Variable costs	Per box		Fixed costs	Per year
Materials	2 kgs @ 3.00 per kg		Manufacturing overhead	240,000
Skilled labour	1.5 hours @ 13.80 per hour		Administration overhead	180,000
Unskilled labour	2 hours @ 10.60 per hour		Design and distribution costs	165,000

Required

1. Calculate the variable costs and contribution per box, the fixed costs and the profit expected on the budgeted sales (10 marks)
2. Briefly explain variable and fixed costs (5 marks)
3. Calculate the breakeven point in number of boxes and value of sales. (4 marks)
4. Calculate the margin of safety in number of boxes and as a percentage of sales (3 marks)
5. Calculate the number of boxes required to be sold to make a profit of 350,000 (3 marks)
6. Explain the usefulness to management of the figures you have calculated in parts c, d and e (10 marks)

Part 2

The company are referring to the start of production as month 1.

Inventory of finished goods will be 40% of the following months budgeted sales. No inventory of materials will be held.

The division expects sales in month 2 to be 1,000 units, in month 3 to be 1,200 units and in month 4 to be 1,500 units.

The customer will be expected to pay 25% in the month of sale and 75% in the following month. Purchases of materials will be paid 30% in the month of purchase and 70% in the following month.

Manufacturing overhead will be paid 80% on a monthly basis and 20% on a quarterly basis starting in Month 1.

Administration costs are paid in equal monthly amounts.

Product and packaging design costs of 60,000 will be paid in month 1.

A staff bonus of 30,000 for winning the contract will be paid in month 3.

The division expects to have a bank balance of 170,000 at the start of month 1.

Required

1. Prepare the production budget in number of boxes for months 1, 2 and 3 (8 marks)
2. Prepare a cash budget for the same three months (22 marks)
3. Comment on the cash budget, highlighting issues which you think should be drawn to the attention of management (10 marks)