Reference no: EM132960263

Tech Games is a division of a company that produces video games and consoles for the teenage market. The division specialises in the manufacture of hand held games controllers.

• The division operates from a factory in Dublin and relies on a good distribution network to supply the games controllers to all of its customers via retail shops. In addition, the division has a retail outlet on the factory site.

• The division operates a three monthly profit reporting system to the central office. As part of this, the divisional accountant prepares a cash flow forecast on a three monthly basis. It is now time to prepare the next three month cash flow forecast for January, February and March 2014.

Additional Information:

1. Games Controllers are sold to the retail shops and the price per controller is €12.00. All of these are sold for credit, the customers receiving a 30 day credit payment period.
2. Games Controllers are sold from the factory shop for cash. These are priced at €16.00 per controller.
3. Sales of controllers to the retail shops are expected to be 15,000 in January; 16,000 in February; and 15,500 in March. The sales from the factory shop will remain static at 40 controllers per month.
4. The shop costs are €8,000 per month. These are all fixed costs including €650 depreciation.
5. The raw materials are 70 cents per controller. It is expected that there will be a price increase in the February to 72 cents per controller.
6. The manufacturing process is mainly mechanized but the games controllers are tested manually. Each controller takes 3 minutes to test. The current rate of pay for the testing staff is €5.50 per hour. The staff are paid in the month that the wages are incurred, and are due a 2% pay award in March.
7. The fixed production overhead is €4,000 per month. This includes depreciation of machinery of €500.
8. The division has decided to produce sufficient Games Controllers to allow them to increase their closing stocks by 9,000 controllers per month over the three month period. It will also purchase enough materials to permit an increase in stocks of raw materials sufficient for the manufacture of 12,500 controllers per month.
9. The raw materials that the division has in stock at the start of the period are sufficient to make 20,000 controllers. There were 12,000 controllers already in stock at the end of December.
10. Although the division has a 30 day credit policy, the divisional accountant assumes that 40% of debtors will pay one month after purchase and the remainder two months after purchase.
11. Debtors outstanding at the beginning of December are €120,000. These are to be incorporated into the cash flow as follows:
January €64,000
February €56,000
12. Raw materials are paid for one month in arrears. Creditors in respect of December were €70,500.
13. The division's bank balance is €35,000 overdrawn at the end of December.
14. The division will make a €60,000 loan repayment to the company in February.

Required:

Problem (a) Prepare cash budgets for each of the three months January, February and March 2014.

Problem (b) Comment on the results to management.