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I’m trying to workout the unit breakdown, but I keep messing up the calculation. I’ve tried finding the video linking to the question, but doesn’t seem to be around. Question is below.
CF manufactures a single product and is preparing monthly budgets for the first three months of 20X5. The cash balance at the end of December 20X4 is expected to be $50,000.
The following standard revenue and cost data is available:
Selling price $15·00 per unit
Materials 2 kg per unit at $2·40 per kg
Labour $1·60 per unit
Direct expenses $1·40 per unit
Sales in December X4 were 10,000 units and are forecast to be the same in January X5. As a direct result of marketing expenditure of $95,000 at the start of February 20X5, sales are expected to be 11,000 units in February and to increase by 1,000 units in each subsequent month.
30% of sales are paid for when they occur and 70% of sales are paid for in the month following sale.
Stocks of finished goods at the end of each month are required to be 20% of the expected sales for the following month. Stocks of materials at the end of each month are required to be 50% of the materials required for the following month’s production.
Materials are paid for in the month following purchase.
Labour and direct expenses are paid for in the month in which they occur. Overheads for
production, administration and distribution will be $32,000 per month, including depreciation of
$10,000 per month. These overheads are payable in the month in which they occur.CF has a $500,000 bank loan at 5% per annum on which it pays interest twice per year, in March and September.
Prepare the cash flow forecasts for CF for the first three months of 20X5
For example, the answer says that the Unit breakdown is 10,200 / 11,200 / 12,200 but I don’t know how you get that calculation for the units from the question.
Hi,
I think that the first figure we’ve included might be incorrect and should be 10,000. The calculation of the production number of units is as follows:
Sales + Closing inventory – Opening inventory
We’re told that the closing inventory of finished goods is 20% of the following months sales, so the closing inventory for December would be 2,000 (20% of 10,000), for January 2,200 (20% x 11,000) and for February 2,400 (20% x 12,000).
If the closing inventory is 20% of the following month’s sales then the opening inventory must be 20% of the current months sales as the closing inventory figure becomes the opening inventory figure for the following month, so for December and January the opening inventory is 2,000 and for February it is 2,200.
If you plug those figures into the calculation for production number of units each month then you get 10,000/10,200/11,200.
Hope that helps.
Thanks
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