Bright Papers Ltd has established a new subsidiary company to produce extra-large rolls of wall covering. Management forecasts for the first four years of trading are as follows:

Further information

(a). Estimates for the average credit period given and taken are based on balances at the end of each year.

(b). Costs other than direct materials are to be paid for in the month they are incurred.

(c). The company will adopt the FIFO assumption in relation to cost of goods sold.

(d). No increases in production capacity will be required during the first four years of business.

(e). Fixed overhead costs include depreciation of £1,500,000 per annum.

(f). No stock of direct materials will be held. The supplier will deliver goods daily, as required. No work in progress will exist at the end of any year.

Required

Prepare annual cash budgets for the new subsidiary for each of the first four years of trading.

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Year 1 Year 2 Year 3 Year 4 Sales (in units) Production (in units) 800,000 950,000 1,500,000 1,200,000 1,300,000 850,000 1,000,000 1,600,000 £ Selling price per unit 10.20 10.56 11.04 12.00 Costs per unit: Direct materials 2.04 2.28 2.64 3.00 Direct labour 0.60 0.75 0.90 0.90 Variable overhead 0.40 0.50 0.60 0.60 Fixed overhead £5,000,000 £5,100,000 £5,200,000 £5,300,000 Average credit period given 1 month 1 month 1.5 months 2 months to customers Average credit period taken from suppliers of materials 2 months 1.5 months 1.5 months 1 month