Question

Case Study – 2

OHI Marine offers a range of products and services related to the fishing, marine and water sports industry. The company is the exclusive dealer of Jet Skis in GCC countries. The company procures Jet Skis from various international suppliers and sells for customers in all the GCC countries. The Marketing Department of the company has developed the sales forecast for the months of March to August 2020 assuming the selling price of RO 2000 per unit. However, the marketing Department predicts a fall in the selling price by 10% per unit from the month of June 2020.

Sales forecast (in Units)

March 60 April 80 May 100 June 110 July 120 August 90

Other relevant data :

i) The Cash balance as on 1st May 2020 is RO 25,000

ii) The company has 30 units of finished goods in stock as on 1st March 2020. The company wishes to maintain the finished goods inventory equal to 40% of the next month sales. Each unit is purchased from the suppliers at RO 1400 but the company expects the prices to decrease by 5% per unit from the month of June 2020.

iii) 50% of the sales are on cash basis. All the amount from credit sales is collected in the second month following sales

iv) Trade Creditors are paid in the month following purchases.

v) The selling expenses amount to 10% of sales. The lag in payment of selling

expenses is one week.

vi) The sales commission is paid at 5% of sales in the same month in which it is earned.

vii) The company has taken a loan of RO 40,000 in the month of July.

viii) Income on investments of RO 2000 is expected to receive in the month of June.

ix) The company purchased machinery worth of RO 100,000 in the month of July. The amount is payable in four equal instalments starting from May.

x) Depreciate machinery at RO 10,000 per month.

As a financial manager, prepare the cash budget of United Gulf Pipe Manufacturing Co. LLC for four months starting from May 2020.

Answer 1

Working notes

	Mar	April	May	June	July	August
Estimated sales units	60	80	100	110	120	90
Selling Price Per Unit	2000	2000	2000	1800	1800	1800
Budgeted Sales	120000	160000	200000	198000	216000	162000
Cash Sales (50%)	60000	80000	100000	99000	108000	81000
Cash collected from debtors			60000	80000	100000	99000
(second month after sales)
	Mar	April	May	June	July	August
Estimated sales units	60	80	100	110	120	90
Desired ending inventory	32	40	44	48	36	0
(40% of next month)
Finished Stock-Opening	30	32	40	44	48	36
Purchases required	62	88	104	114	108	54
Purchase rate	1400	1400	1400	1330	1330	1330
Budgeted Purchases	86800	123200	145600	151620	143640	71820
Payment made		86800	123200	145600	151620	143640
(next month following purchases)
	Mar	April	May	June	July	August
Selling Expenses	12000	16000	20000	19800	21600	16200
(10% of sales)
(selling expenses paid after one week)
Selling expenses paid		12000	16000	20000	19800	21600
	Mar	April	May	June	July	August
Sales Commisison	6000	8000	10000	9900	10800	8100
(5% of sales)

Cash Budget

	May	June	July	August	Total
Cash In hand-Beginning	25000	26800	7300	48080	25000
Cash Sales	100000	99000	108000	81000	388000
Collected from debtors	60000	80000	100000	99000	339000
Loan taken			40000		40000
Income on investments		2000			2000
Total cash available	185000	207800	255300	228080	794000
Payment for purchases	123200	145600	151620	143640	564060
Purchase of Machinery	25000	25000	25000	25000	100000
(4 instalments )
Selling Expenses		20000	19800	21600	61400
(10% of sales)
Sales Commisison	10000	9900	10800	8100	38800
(5% of sales)
Total cash payments	158200	200500	207220	198340	764260
Ending cash balance	26800	7300	48080	29740	29740