Reference no: EM13488350

Citilinkwill start a new business line on 1st July, 2011 tomake and sell bus souvenirs. The target sales and production volume are 525,000 in next year. The following projected data is available.

Total costs $1,428,000
Costs as percentage of sales
Raw materials 15%
Direct labour 20%
Variable production overheads 11%
Fixed production overheads 10%
Other costs 12%
Working capital statistics
Average raw material holding period 4 weeks
Average finished goods holding period 4 weeks
Average debtors' collection period 6 weeks
Average creditors' payment period on:
- Raw materials 4 weeks
- Direct labour 1 week
- Variable production overheads 8 weeks
- Fixed production overheads 5 weeks
- Other costs 12 weeks
Other relevant information
- Assume all operation will start at 1st July, 2011.
- Assume sales are the same every month oncethe souvenirs are available for sales.
- All finished goods inventory values include raw materials, direct labour, variable production overheads andapportioned fixed production overhead costs.
- Assume there are 52 weeks in one year.
- Assume that production and sales volumes are the same.

As an accountant of the new business line, you have to write a BUDGET PROPOSAL to the Finance Director of Citilink. The proposal should include the following issues:

(a) Identify who might be involved in the working capital decision making of the new business line and assess the information needs of them individually.

(b) Calculate with explanation the unit costs of the souvenirs. You should state your assumption, if any.

(c) Determine the priceof the souvenirs and explain any other information that might be relevant for deciding the price

(d) Discuss how sensitivity analysis will help the cost and pricing decision of the new business line

(e) Estimate average working capital required by the new business line for the year. Explain overtrading and analyse whether there is any overtrading problem if the new business line only reserves $150,000 working capital.

(f) Prepare a monthly cash budget for the new business line for the year ended 30th June, 2012. Identify the timing of cash surplus and shortage by assuming zero cash at 1st July, 2011. You should clearly state your assumption, if any.

(g) Identify other budgets that may be helpful to analyse and monitor the new business line. Explain.