Reference no: EM132834194

 Case Study 

ABC Ltd. is a new business which buys TVs and modifies them to the specific needs of the customer. The business will acquire fixed assets costing £200,000 and a stock of 1000 standard TVs on the first day of business. The fixed assets are expected to have a five-year life with no residual value at the end of that time. Sales are forecast as follows: 

Year 1 - Quarter 1 – 8100 TVs

Year 1 - Quarter 2 – 8400 TVs

Year 1 - Quarter 3 – 8700 TVs

Year 1 - Quarter 4 – 7800 TVs

Year 2 - Quarter 1 – 8100 TVs 

The selling price of each TV will be £90 

The cost of production of each TV is as follows:

Cost of standard TV purchased - £30

Direct labour - £33

Fixed Overhead - £12 

The fixed overhead per unit includes an allocation of depreciation. The annual depreciation is calculated on a straight-line basis and is allocated on the basis of cost per unit to be produced during the year. Suppliers of the TVs will allow one month’s credit. Customers are expected to take two months’ credit. Wages will be paid as they are incurred in production. Fixed overhead costs will be paid as they are incurred.

The stock of finished goods at the end of each quarter will be sufficient to satisfy 20% of the planned sales of the following quarter. The stock of standard TVs will be held constant at 1000 units. 

It may be assumed that the year is divided into quarters of equal length and that sales, production, and purchases are spread evenly throughout any quarter. 

Question One

For each quarter of the first year of trading, produce the sales budget, production budget, and cash budget. Your answer should be of an equivalent of up to 500 words. 

Question Two

Critically evaluate the process of creating the budgetary information for ABC Ltd. This should include a discussion of the budgets produced, as well as how creating budgetary information will help the business. Your answer should be up to 500 words.