Starmer Ltd. manufactures and sells ink cartridges directly to office supply retailers. The current economic downturn has hit the company hard and management are focusing on a cost reduction exercise to allow the company compete in a very competitive market. The accounts assistant has assembled the following information:

1. Starmer Ltd. sells its ink cartridges to office supply retailers. Sales units achieved in 2020 were:

June 12,000

July 20,000

August 15,000

September 14,000

However due to aggressive marketing campaigns and pricing strategies undertaken by their competitors, Starmer Ltd. has recently lost some of its market share. The marketing manager anticipates that sales in the corresponding months of 2021 will be down by 40%. The ink cartridge is priced at €25 per unit. Sales proceeds are collected from the office supply retailers, on average 50% in the month of sale and 50% in the month after sale.

2. The board of directors were obviously very concerned about this forecasted fall in demand and set up a working group to investigate the potential of selling their product through the internet. These sales would be in addition to sales to office supply retailers. Following some market research the group expect that monthly sales through the internet will be 5,000 units in June and July, increasing to 7,000 units in August and September. The sales price will be €25 and sales proceeds will be collected in the month following sale less 2% commission charged by the online payments handling company.

1. The company policy is to maintain stocks of completed cartridges equal to 75% of the expected sales for the following month.
2. The primary raw material is ink pigment. Each cartridge produced requires 1.5 grams of ink pigment. Starmer Ltd.'s policy is to maintain a stock of ink pigment equal to all of the following month's expected production requirement. Ink pigment currently costs €5 per gram and is paid for in the month following purchase. The purchasing manager has negotiated a 10% cost reduction with the supplier effective from 1^st July 2021.
3. Annual fixed overheads are €180,000. They include depreciation charges relating to plant and machinery that originally cost €600,000, has a nil residual value and is being depreciated on the straight line basis over 10 years.
4. Ontime Ltd., a reputable nationwide delivery firm, has been awarded the internet orders delivery contract. A flat monthly fee of €5,000 has been agreed for delivery of up to 6,000 units; each additional unit in excess of that volume will incur a cost of €3 per unit payable in the month incurred.
5. Powertec Ltd. will host the company website for a fee of €2,500 per month commencing in July.
6. Labour costs are €190,000 per month at present but a pay cut of 5% has been agreed with the union which will come into effect in August 2021.
7. A tax liability of €15,000 relating to 2020 is due for payment on 15^th August 2021.
8. The company anticipates a bank overdraft of €62,000 on July 1^st.

(a) Prepare a cash budget for Starmer Ltd. for the two months July and August 2021 (show all workings).

Answer rating: 100% (QA)

Answer Starmer Ltd Cash Budget For the months July August July August Beginning cash balance 62000 1908125 Add Total cash collection from customers 362500 409500 Total cash available a 300500 6003125 ... View the full answer