The following information relates to the actual sales of Griffton Ltd during the last four months of its financial year.

The budgeted information below relates to the next financial year commencing 1 July 20X2:

(i) The company forecasts that sales quantity will decrease in July by 10 per cent of the level in June. The reduced quantity will remain for August and September, but will then increase by 10 per cent in October, and remain fixed for the next three months.

The sales price will remain at £55 each until 1 September when it will be increased to £60 per unit, this price will be effective for a minimum of six months. 50 per cent of sales are on a cash basis and attract a 2 per cent cash discount, the remaining 50 per cent of sales are paid two months in arrears.

The company arranges its purchases of raw materials such that the closing stock at the end of each month exactly meets the requirement for the following month’s sales. Each unit sold requires 2 kg of material at £15 per kg; this price is fixed until December 20X3.

(ii) As a separate exercise, the managing director asks for stock levels to be reviewed, and asks you about the use of economic order quantities at some time in 20X3. The following budgeted data would apply to this exercise:

Required:

A. Draw up monthly budgets for the four-month period commencing 1 July 20X2 for:

(a) Debtors in £s;

(b) Raw material purchases in kg.

B. From the budgeted information given in note (ii) calculate the economic order quantity for the company. Briefly outline the limitations of this ordering method.

Transcribed Image Text:

Quantity (units) Price each March 900 £55 April 900 £55 May 900 £55 June 1,000 £55