Question

Mr I. Derdown has received an inheritance of £150,000 and is considering forming a business to manufacture duvet quilts. The following data is available to assist Mr Derdown in making a decision about this venture. Plant and machinery will cost £50,000 payable on receipt in January. It is anticipated that the machinery will last five years. The duvets will be manufactured in the month prior to the month of sale. The material cost per duvet is £12. Purchases will be made in the month of production but not paid for until the following month. The wage cost per duvet of £5 will be paid as incurred. The variable manufacturing overheads per duvet are expected to be £4, half being paid in the month of production and the remainder being paid the following month. Fixed overheads of £15,000 will be paid each month. Launch costs of £10,000 each month will be paid in January and February. The selling price of the duvet will be £30 with expected sales as follows: February 4,000 duvets March 5,000 duvets April 6,000 duvets May 7,000 duvets From June onwards, sales will remain at a level of 7,000 duvets each month. One quarter of sales will be cash sales, the remainder will be credit sales for which payment will be received in the month after sale.

Required: Prepare a monthly cash budget for the period January to June. Comment on the projected financial position of the business and suggest ways that Mr Derdown might improve the situation.

Answer 1