Reference no: EM132872322

Question - Allan Smythe is the owner of Cakes-2-U, a specialist cake service that makes and delivers to wedding and celebratory cakes to customers. At the end of December 2016 there is only $260 in the company bank account. His other problem is that he would like to purchase a new vehicle (costing $25,000) for the business, but he doesn't know when he will have the $10,000 deposit required. One of Smythes friends has advised him that he should prepare an forecast of his future transactions, but he is unsure how to do so. He has asked for your assistance and has provided the following information in relation to his business. (You do not have to account for the GST in this question).

The quarter of January to March is Cakes-2-U's busiest quarter each year. In January 2016 he earned the following revenue: January $12,000, February $14,000, and March $15,000. After this the business slowed down a little. In the next quarter he earned the following revenue. April, $14,000, May $12,000 and June $10,000. Allan is confident that revenue will be higher in the early part of 2017. He has already signed contracts to complete the following jobs in January 2017.

Piketon's $1,900

Fox's $1,750

Tan's $1,800

Singh's $1,950

Strong's $1,850

Ablert's $1,950

O'Conner's $1,900

For the months of February and March, Allan expects to earn fees from about 10% higher than the previous year, but in the quarter April-June he doesn't expect the same level of business. In fact, he has stated that he expects his revenue to be about 5% lower than in the same quarter last year

Allan purchases all ingredients and materials for jobs as they are required. When he is quoting for a job, he calculates the cost of materials and multiplies this by 4 to calculate the total cost of the job. Allan argues that this allows for labour costs, vehicle expenses and a profit margin for himself. The cost of materials is therefore 25% of the revenue expected to be earned.

The business employs 2 assistants who are each paid on Fridays. One is employed full time and is usually paid $500 per week. The other is employed on a casual basis. During the busiest months (January to March) the casual is probably paid around $500 per week. In the period April-June his wages will drop back to $400 per week.

The company has one vehicle which delivers all orders. Petrol expenses for the vehicle are usually around #200 per month, but in the January-March quarter this will go up to about $240 per month. The vehicle is due for a service in February, and this will cost about $320

Insurance on the vehicle is due on 2 March each year, and is expected to cost $640 this year. Registration of the vehicle is due on 11 June and should be about $540

Allan advertises his business in the local papers at a cost of $150 per month

New equipment will have to be purchased during February at a cost of $3,800. Allan has arranged for a credit arrangement to help with this purchase. The supplier has agreed to take a $1,000 deposit on delivery of the equipment, and then $400 payments will have to be paid each month until it is fully paid off

Allan does his office work from home. He usually incurs office expenses for the business at around $100 per month

Loan repayments of $1500 are due on 15 February, 15 May, 15 August and 15 November

Allan usually redraws $500 each Friday for personal use

Required -

a) Prepare a cash budget for Cakes-2-U for the period January - June 2017. You budget should allow for the anticipated cash balance at the end of each month.

b) Provide a written report that states when Allan will be able to afford the $10,000 deposit for the new vehicle. Support your answer with reasons.

c) Arrange a time and present your budget to Allan (role-played by your assessor) and explain your proposed cash budget along with your recommendations. It is important that you have access to a soft-copy of your budget for this meeting.