Prepare a monthly cash budget, Financial Management

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Citilink will start a new business line on 1st July, 2011 to make and sell bus souvenirs. The target sales and production volume are 525,000 in next year. The following projected data is available.

Total costs $1,428,000

Costs as percentage of sales

Raw materials 15%

Direct labour 20%

Variable production overheads 11%

Fixed production overheads 10%

Other costs 12%

Working capital statistics

Average raw material holding period 4 weeks

Average finished goods holding period 4 weeks

Average debtors' collection period 6 weeks

Average creditors' payment period on:

- Raw materials 4 weeks

- Direct labour 1 week

- Variable production overheads 8 weeks

- Fixed production overheads 5 weeks

- Other costs 12 weeks

Other relevant information

- Assume all operation will start at 1st July, 2011.

- Assume sales are the same every month once the souvenirs are available for sales.

- All finished goods inventory values include raw materials, direct labour, variable production overheads and apportioned fixed production overhead costs.

- Assume there are 52 weeks in one year.

- Assume that production and sales volumes are the same.

As an accountant of the new business line, you have to write a BUDGET PROPOSAL to the Finance Director of Citilink. The proposal should include the following issues:

(a) Identify who might be involved in the working capital decision making of the new business line and assess the information needs of them individually.

(b) Calculate with explanation the unit costs of the souvenirs. You should state your assumption, if any.

(c) Determine the price of the souvenirs and explain any other information that might be relevant for deciding the price.

(d) Discuss how sensitivity analysis will help the cost and pricing decision of the new business line

(e) Estimate average working capital required by the new business line for the year. Explain overtrading and analyse whether there is any overtrading problem if the new business line only reserves $150,000 working capital.

(f) Prepare a monthly cash budget for the new business line for the year ended 30th June, 2012. Identify the timing of cash surplus and shortage by assuming zero cash at 1st July, 2011. You should clearly state your assumption, if any.

(g) Identify other budgets that may be helpful to analyse and monitor the new business line.

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