Sporting Ltd is a division of a company that manufactures specialised sports bags. The division operates from

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Question:

Sporting Ltd is a division of a company that manufactures specialised sports bags.

The division operates from a factory in Cork and supplies the sports bags to its customers via retail shops. In addition, the division has a retail outlet on the factory site and sells to the general public via this retail outlet.

The division operates a three-monthly profit reporting system to the central office. A cash flow forecast is prepared on a three-monthly basis. The next three-month cash flow forecast is now due to be prepared for January, February and March 2021.

Additional Information:

The sports bags are sold to the retail shops and the price per bag is €12.00. All of these are sold for credit, the customers receiving a 30-day credit payment period.
The sports bags which are sold from the factory shop are sold for cash. These are priced at €16.00 per bag.
Sales of bags to the retail shops are expected to be 15,000 in January; 16,000 in February; and 15,500 in March. The sales from the factory shop will remain static at 40 bags per month.
The shop fixed costs are €8,000 per month which includes €650 for depreciation.
The raw materials are 70 cents per bag. It is expected that there will be a price increase in the February to 72 cents per bag.
The manufacturing process is mainly mechanized but the sports bags are tested manually. Each bag takes 3 minutes to test. The current rate of pay for the testing staff is €5.50 per hour. The staff are paid in the month that the wages are incurred and are due a 2% pay award in March.
The fixed production overhead is €4,000 per month. This includes depreciation of machinery of €500.
The division has decided to produce sufficient sports bags to allow them to increase their closing inventories by 9,000 bags per month over the three-month period. It will also purchase enough materials to permit an increase in inventories of raw materials sufficient for the manufacture of 12,500 bags per month.
The raw materials that the division has in inventory at the start of the period are sufficient to make 20,000 bags. There were 12,000 bags already in inventory at the end of December 2020.
Although the division has a 30-day credit policy, the divisional accountant assumes that 40% of trade receivables will pay one month after purchase and the remainder two months after purchase.

Trade receivables outstanding at the beginning of December 2020 are €120,000. These are to be incorporated into the cash flow as follows:

January 2021 €64,000

February 2021 €56,000

Raw materials are paid for one month in arrears. Trade payables in respect of December 2020 were €70,500.
The division’s bank balance is €35,000 overdrawn at the end of December.
The division will make a €60,000 loan repayment to the main company in February.

You are required to :

(a) Prepare cash budgets for each of the three months January, February and March 2021.

(b) Provide meaningful comments on the results to management explaining what the results mean for the company and what the directors need to address in the short term and the long term.