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- September 13, 2014 at 10:28 am #194860
In the near future a company will purchase a manufacturing business for $315,000, this price to include goodwill ($150,000), equipment and fittings ($120,000), and inventory of raw materials and finished goods ($45,000).
A delivery van will be purchased for $15,000 as soon as the business purchase is completed. The delivery van will be paid for in the second month of operations.
The following forecasts have been made for the business following purchase:
a) Sales (before discounts) of the business’s single product, at a mark-up of 60% on production cost will be:
Month 1 2 3 4 5 6
($000) 96 96 92 96 100 10425% of sales will be for cash; the remainder will be on credit, for settlement in the month following that of sale. A discount of 10% will be given to selected credit customers, who represent 25% of gross sales.
b) Production cost will be $5 per unit. The production cost will be made up of:
Raw materials $2.50
Direct labour $1.50
Fixed overhead $1.00c) Production will be arranged so that closing inventory at the end of any month is sufficient to meet sales requirements in the following month. A value of $30,000 is placed on the inventory of finished goods, which was acquired on purchase of the business. This valuation is based on the forecast of production cost per unit given in
(b) above.d) The single raw material will be purchased so that inventory at the end of a month is sufficient to meet half of the following month’s production requirements. Raw material inventory acquired on purchase of the business ($15,000) is valued at the cost per unit that is forecast as given in (b) above. Raw materials will be purchased on one month’s credit.
e) Costs of direct labour will be met as they are incurred in production.
f) The fixed production overhead rate of $1.00 per unit is based upon a forecast of the first year’s production of 150,000 units. This rate includes depreciation of equipment and fittings on a straight-line basis over the next five years. Fixed production overhead is paid in the month incurred.
g) Selling and administration overheads are all fixed, and will be $208,000 in the first year. These overheads include depreciation of the delivery van at 30% pa on a reducing balance basis. All fixed overheads will be incurred on a regular basis, and paid in the month incurred, with the exception of rent and rates. $25,000 is payable for the year ahead in month one for rent and rates.
Prepare a monthly cash flow forcast. You should include the business purchase and the first four months of operations following purchase.
In this math i’m following the proforma of cash flow forecast.But i’m having a problem to find out the cash outflow section(Purchase working).
so,sir plz give me a hint to figure out this purchase working……..
September 13, 2014 at 3:17 pm #194876I obviously cannot answer the whole question here, but I will start you off and hopefully you will then be OK.
First you need to calculate the units sold each month.
Since the production cost is $5 per unit, the selling price is 5 + (60% x 5) = $8 per unit.
We know the revenue each month, so dividing by 8 gives the units.
Month 1: 12,000; Month 2: 12,000; Month 3: 11,500 and so on.
Next you need to know the production each month (which means adjusting for the opening and closing inventory of finished goods.).
The inv at the start of Month 1 is 30,000 / 5 = 6,000 units
The inv at the end of Month 1 is enough for the sales of the following month, so is 12,000 units.
At the end of Month 2 is it 11,500 units, and so on.So…production in Month 1 = 12,000 – 6,000 + 12,000 = 18,000 units.
In month 2 it is 12,000 – 12,000 + 11,500 = 11,500 units
and so on.So now it is easy to calculate the labour cost.
For purchases, we now need to adjust for the opening and closing inventories of raw materials.
At the start of month 1 the inv is 15,000/5 = 3,000 units.
At the end of month 1 it is 1/2 x 12,000 = 6,000
At the end of month 2 it is 1/2 x 11,500 = 5,750
and so onSo the purchases in month 1 are 18,000 + 6000 – 3000 = 21000 units
In month 2 it is 12,000 + 5750 – 6000 = 11750 units
and so on.Hopefully it now makes sense, but post again if you are not sure.
(and check my arithmetic in case I have made a silly mistake adding up 🙂 )
September 13, 2014 at 7:08 pm #194895Thanks for helping me…………..
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