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4. The labour union of Empire plc announced a strike commencing at the beginning of week 3 that will last 4 weeks. This means production will stop at the end of week 2. Empire plc intends to continue sales in week 4 selling all finished products from inventory. The inventory level of finished products at the beginning of week 1 is 1200 units (there is no inventory of partly finished goods). The budgeted sales and production levels for week 1-3 are given below: Week 1 800 units Budgeted sales Budgeted production 1200 units The budgeted standard manufacturing cost (per unit) is given below: Direct materials Direct labour Week 2 1000 units 800 units Variable overhead Fixed overhead Week 3 800 units (£) 30 14 16 36 The company uses a full absorption costing system and the overhead absorption rate is based on a budgeted fixed overhead of £36,000 per week (including £2,800 depreciation). During the strike Empire will not incur any labour or variable costs and fixed costs per week reduce by £6,000. The current inventory of raw materials is worth £15,000 and this will rise to £22,000 by the end of week 1 and remain at this level during the strike. Direct materials and direct labour expenses are paid one week after they are incurred. Overhead costs are paid when incurred. Empire sells their product at £120 and receives 70% 1 week after sales and 30% 2 weeks after sales. They currently have a £32,000 outstanding bill from their material suppliers (due in week 1) and a £12,800 unpaid wages bill in respect of their labour force (due in week 1). Receivables are £124,800 (£96,000 due in week 1, the remainder due in week 2). REQUIRED: (a) Prepare a cash budget for week 1-6 showing the balance of cash at the end of each week. The cash balance at the start of week 1 is £2,000. (c) Comment on the credit period the company gives to customers. The marketing manager did a study and found that sales could increase if credit was extended by another week. Evaluate this option and mention the trade-off involved. (No calculations required). 4. The labour union of Empire plc announced a strike commencing at the beginning of week 3 that will last 4 weeks. This means production will stop at the end of week 2. Empire plc intends to continue sales in week 4 selling all finished products from inventory. The inventory level of finished products at the beginning of week 1 is 1200 units (there is no inventory of partly finished goods). The budgeted sales and production levels for week 1-3 are given below: Week 1 800 units Budgeted sales Budgeted production 1200 units The budgeted standard manufacturing cost (per unit) is given below: Direct materials Direct labour Week 2 1000 units 800 units Variable overhead Fixed overhead Week 3 800 units (£) 30 14 16 36 The company uses a full absorption costing system and the overhead absorption rate is based on a budgeted fixed overhead of £36,000 per week (including £2,800 depreciation). During the strike Empire will not incur any labour or variable costs and fixed costs per week reduce by £6,000. The current inventory of raw materials is worth £15,000 and this will rise to £22,000 by the end of week 1 and remain at this level during the strike. Direct materials and direct labour expenses are paid one week after they are incurred. Overhead costs are paid when incurred. Empire sells their product at £120 and receives 70% 1 week after sales and 30% 2 weeks after sales. They currently have a £32,000 outstanding bill from their material suppliers (due in week 1) and a £12,800 unpaid wages bill in respect of their labour force (due in week 1). Receivables are £124,800 (£96,000 due in week 1, the remainder due in week 2). REQUIRED: (a) Prepare a cash budget for week 1-6 showing the balance of cash at the end of each week. The cash balance at the start of week 1 is £2,000. (c) Comment on the credit period the company gives to customers. The marketing manager did a study and found that sales could increase if credit was extended by another week. Evaluate this option and mention the trade-off involved. (No calculations required).

Answer rating: 100% (QA)

Step 1 Cash Budget The purpose of preparing the cash budget to know the cash movement which are invo... View the full answer