Reference no: EM133070121

Question - Mimosa Ltd manufactures two models of electric heaters: HM1 and HM2. The HM1 is sold for £400 and the HM2 for £100. The Sales Director has provided the following sales projections for the next three months.

HM1 HM2

July 6,000 45,000

August 7,150 44,200

September 8,300 46,000

In the factory, the production supervisor has received the projected sales figures and gathered information needed to compile production budgets. He found that 650 units of HM1 and 585 units of HM2 were in stock at the start of July. Company policy dictates that ending inventory should equal 20 percent of the next month's sales for HM1 and 10 percent of next month's sales for HM2.

In the process of collecting the information for the above budgets, you discover that the Sales Director and production supervisor have included budgetary slack in their estimates. Despite this, you continue to produce the budgets based on the details provided by the Sales Director and production supervisor.

Required -

(i) Prepare a sales budget for each month and for the quarter in total. Show sales by models and in total for each month.

(ii) What factors might the company consider in preparing the sales budget?

(iii) Prepare a separate production budget for each model in July and August.

(iv) What factors should the company consider in deciding the inventory levels?

(v) Explain the issues that arise from the inclusion of slack in budgets.