Reference no: EM131111953

Case study 3
Sons manufacture moulded plastic industrial storage boxes. They are currently prec,=.- oudget for the first quarter of the coming financial year 2010-11. .3'e expected to be 5000 boxes in July, 6000 boxes in August, 7500 boxes in September and 7C:: ;:oxen in October. Each box is expected to sell for $30 in July, with a 10% price rise on 1 Aug„s: sales are made on credit, and are normally collected as follows:
• 20% n the month of sale
• 50% in the month after sale
• 30% in the second month after sale.
The business ends each month with enough finished goods inventory to cover 20% of the next month's sales. Inventories are valued on a first-in, first-out basis.
Each box requires 500 grams of plastic which costs $14 per kilogram. The inventory policy for raw material is to carry enough plastic to meet 10% of the next month's production require¬ments. All purchases of material are on credit and are paid for in the month following purchase.
Each box takes 0.25 hours of direct labour to produce at $16 per hour. Changes to production methods scheduled for 1 September are anticipated to reduce this to 0.2 hours.
Factory overheads are calculated at $5 per unit. This amount includes depreciation of plant of $4000 per month and wages of $5000 per month.
Selling expenses are estimated to be $1 per box sold. Administration expenses are estimated to be $15000 per month (including $2000 depreciation of office equipment and $3500 of wages), while financial expenses are $5000 per month.
Direct labour, factory overheads and general operating expenses are paid for in the month in which they are incurred. Apart from wages, all expenses are subject to GST.
The balance sheet of S. Knight and Sons as at 30 June 2011 is:

Owners' equity
Capital 159 440
Assets
Cash at bank 25 000
Accounts receivable 160 000
($40 000 owing from May sales)
($120 000 owing from June sales)
Inventory - Raw materials (260 kg at cost) 3 640
Inventory - Finished goods (1000 units at cost) 16 000
Plant and equipment (at cost) 100 000
Less Accumulated depreciation 30 000 70 000
Office furniture (at cost) 25 000
Less Accumulated depreciation 5 000 20 000
Land and buildings (at cost) 104 000
Total assets 398 640
Less Liabilities
Accounts payable (raw materials) 37 200
Accounts payable (GST due to ATO) 2 000
Long-term loan 200 000
239 200
Net assets 159 440

Additional information:
• It is desired to pay off as much of the loan (to the nearest $10 000) at the end of September as is possible but still leaving a minimum cash balance of $25 000.
• Old plant costing $20 000, which has been depreciated by $5000, is expected to be sold in July for $10 000 cash. New plant costing $24 000 will be purchased on credit in July, with payments to be made equally in August and September. These transactions are subject to GST.