Prepare the firm inventory budget

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Reference no: EM131502611

INTRODUCTION TO ACCOUNTING AND FINANCE ASSIGNMENT - BUSINESS SIMULATION

BUDGETING & PRODUCTION PLANNING

Another year has gone by. It is now the start of January 2023. Over the course of the last year your client has expanded further, adding to its capacity to manufacture prefabricated homes. Those investment decisions have been made using the Weighted Average Cost of Capital and the project evaluation methodology you so helpfully provided to the client in the previous parts of the assignment.

The firm - and the prefabricated homes industry generally - have enjoyed strong growth over the last few years. As a result, many new firms have entered the market, and competition is tough. Your client believes that the days of easy profits in a rapidly-expanding industry are over, and the firm is going to have to plan carefully in order to ensure its success in the long run. Your client has again asked for your help in this planning. Two of the areas in which your client wants your help are budgeting and production planning.

BUDGETING

The firm has found from past experience that demand for prefabricated homes is highly variable throughout the year, making budgeting a difficult process. In particular, the firm has found in previous years that sales sometimes increase sharply in April each year and then decrease again in October. Your client has provided you with the following sales figures for the last three months (October to December 2022) as well as sales forecasts for each of the next 12 months. (Note: These sales figures are expressed as the number of UNITS sold - they are not dollar figures. For example, the firm sold 70 prefabricated homes in October 2022.)

2022				2023
Oct	Nov	Dec	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
70	60	70	60	60	60	90	90	90	90	90	90	60	60	60

You have also been provided with the following information:

The prefabricated homes sell for $40,000 each. This price is not expected to change during 2023.

All values given to you in the rest of this part of the assignment will be in thousands of dollars. All answers that you give in the budgets should be expressed in terms of the number of millions of dollars, rather than the number of dollars. For example, in October 2022, the firm sold 70 units at a price of $40,000 each, resulting in total sales of $2,800,000, but you should just enter 2800 (the number of millions of dollars) in the cash budget.

All sales are on credit. 70% of sales are collected the month after the sale, 20% are collected in the second month after the sale, and the remaining 10% are collected in the third month after the sale.

Cost of sales each month (the value of inventory used in production) is always 60% of sales.

The value of inventory at the end of December 2022 was $240. (Remember, that's the number of millions of dollars. All dollar values will be given this way from now on.) The firm intends to keep inventory at this level throughout January and February, increase the inventory by 10% by the end of March in anticipation of increased sales in April, and then decrease inventory again to $240 by the end of September in anticipation of decreased sales in October.

Purchases in November 2022 totalled $1440 and purchases in December 2022 totalled $1440. All purchases are on credit. 50% of purchases are paid for in the month following the month of purchase, and the remaining 50% are paid for two months after the month of purchase.

Operating costs (other than purchases of raw materials, wages and depreciation) are budgeted to be $440 per month.

Wages (again, shown in millions of dollars) are budgeted to be as follows for each of next 12 months.

Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
310	310	310	390	390	390	390	390	390	310	310	310

The opening cash balance at the beginning of January is $80.

Your task:

1. Prepare the firm's inventory budget for 2023.

2. Prepare the firm's cash budget for 2023.

3. Prepare the firm's accounts receivable budget for 2023.

4. Prepare the firm's accounts payable budget for 2023.

5. Briefly analyse the budgets you have prepared. Highlight any areas of concern in the budgets and give advice to your client. (Examples of possible areas of concern are low or negative cash balances, or excessively high cash balances, both of which are undesirable.)

PRODUCTION PLANNING

As described above, as well as budgetING, the firm needs to focus on production planning. An important of that involves a detailed analysis of costs and knowledge of the firm's break-even point.

Your task:

6. Calculate the firm's break-even point in terms of number of units sold.

7. Advise whether the client can comfortably achieve the break-even level of sales based on the firm's recent performance and its budgeted level of sales.

Attachment:- Assignment Files.rar

Reference no: EM131502611

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Reviews

len1502611

5/20/2017 8:28:22 AM

Hint: You will need to prepare the inventory budget first in order to determine the value of purchases each month. If you know the opening and closing value of inventory, and the value of goods used in production, you can work backwards to calculate the value of purchases needed to achieve the desired closing inventory. Word limit: There is no word limit for Part 6, because it consists mostly of calculations. Your labelling of your results doesn't require many words, but there should be a brief introduction so that the client knows what information your are providing to them. Your answers to Questions 5 and 7 should be concise but informative.

len1502611

5/20/2017 8:28:15 AM

Format for Part 6: The main submission is to be a Word or PDF document, prepared as if it was a consultant's report to a client. It will include Parts 1 to 6, and therefore will be your only submission of Part 6. You might have to use landscape formatting in your Word document in order to display the budgets clearly. You are strongly advised to show your workings so that you can get partial marks if the final answers are not correct but you have done some things correctly. These can be in the form of a separate Word/PDF document or an Excel file (recommended to reduce the chance of error and to make your workings easier to determine). Assume that the client will not see these workings. They are for my benefit only (and ultimately, yours). The main Word/PDF report, including your final submission for all parts of Assignment - see below - should be presented as a self-contained report to your client.

len1502611

5/20/2017 8:28:08 AM

Format for Final Submission: The main submission is to be Word or PDF. You have probably previously submitted a spreadsheet as your submission for Part 2 and part of your submission for Part 5. After correcting for any errors, these tables should be pasted into the final submission. Remember that you don't give spreadsheet files to your client. You present them with properly formatted tables in a Word or similar document. This will be your final submission of all parts of this assignment.

len1502611

5/20/2017 8:28:01 AM

Parts 1 to 5 will be based on the drafts you have submitted previously, with corrections based on the solutions and feedback you have received. Do not adjust your recommendations to the client based on anything the client has subsequently done; only make changes based on the solutions provided and specific feedback you have received from the person marking your earlier drafts. The final submission is to be a summary of all the advice you have given to the client over the course of the assignment. Marks will be given for presentation, so ensure that the entire submission is neatly and professionally formatted as a report from a consultant to a client. You do not need to provide workings for Parts 1 to 5. If you provided these previously, they will have been taken into account in deciding on your marks for the previous parts. You only need to provide workings for Part 6, as explained above, clearly separate from the main body of the report to the client.

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