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.)
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2022
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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.
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Jan
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Feb
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Mar
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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