Reference no: EM132989886

Accounting for Managers

The overall scenario

Cultural Web Pty Ltd (CW) is a start-up founded by Manu, who has a vision to promote cultural understanding through its product range. Initially, the business will focus on one product. However, the long-term plan is to add a multitude of different products from different cultures, each produced by people of that culture living in a country not of their origin but now their home. These producers will share a cultural story associated with their product.

Your task
Manu is seeking your help, as a management consultant, with the initial business financial plans. Your task is to present the following to Manu:

1. A CVP analysis using monthly sales units with a brief interpretation and implications for the business.

2. A monthly cash budget for the first 6 months of operation (November to April) based on Manu's initial forecasts and estimates, along with a brief interpretation that explains any major implication(s) for the business.

3. Point out financing needs and suggested financing sources.

Details provided by Manu

Manu spent $1,000 in September to set up the company, choose an initial product, negotiate with potential suppliers and undertake market testing. Based on this initial research, Manu has forecast unit sales and unit purchases for the first six months of full operation, which will start in the first week of November. These forecasts are shown in the table below.

A contract has been signed with a supplier of the chosen product. The contract stipulates a price of $55 per unit for orders of 500 or more units. The price is fixed for one year and purchases must be paid for in the month following supply. Purchases are ordered and delivered within the same month. Freight inward, organised with a transport company, will be $10 per unit and be paid in the month following delivery.

Based on his market testing, Manu has settled on a selling price of $80 per unit and credit will be granted to all customers. Collections are estimated as follows: 25% in the month of sale, 70% in the month after sale and 15% in the second month after sale.

A number of other operating expenses have been estimated, all of which will be paid as they are incurred: an assistant at a cost of $3,000 per month; rent of $3,500 per month for office space and an adjacent inventory storeroom; motor vehicle running costs of $500 per month; and $2,500 in other fixed costs.

On the 1st of November, CW will purchase the following assets: a motor vehicle for $30,000 with a 7- year useful life; furniture and fittings for $12,000 with a 10-year useful life; and office equipment for $10,000 with a 3-year useful life. The expected salvage value for all these assets is zero and the straight-line method will be used to depreciate all assets.

At the end of October, Manu intends to put cash into the company bank account for an amount equal to November's forecast cash payments. He wants the company to be making a monthly profit (before interest and tax) of $15,000 by the end of the first six months of full operation.