Question

Khalil manufactures widgets. At the end of June 2014 an extract from the accounting records show the following:

Work in process inventory July 1, 2013    $ 47,000

Direct materials inventory July 1, 2013    $ 2,000

Electricity for plant    $ 7,000

Customer enquiry centre wages    $ 10,000

Plant cleaning services    $ 3,000

Direct labour    $ 34,000

Sales commission $ 8,000

Direct materials purchased $ 29,000

Depreciation expense
(Plant Equipment) $ 9,000

Bad debts expense $ 4,000

Work in process inventory June 30, 2014 $ 37,000

Direct materials inventory June 30, 2014 $ 5,000

Question Part 1) Priska Ltd is expected to begin July with $54,000 cash. She forecasts that sales revenue in July will be $180,000, with cash sales representing half of this sales revenue, the other half is expected to be collected in August. She is scheduled to receive $6,000 cash on a bill receivable in July. Inventory purchases are expected to be $160,000 during July, however Priska Ltd will only pay for three quarters of these purchases during July. In addition operating expenses of 12,000 are paid in July. Priska Ltd. requires a $35,000 minimum cash balance at the end of each month and the bank automatically extends credit to the store in multiples of $7,000.

REQUIRED: Prepare Priska Ltd’s cash budget for July.

Part 2) Nelson Ltd is considering outsourcing, rather than manufacturing, component X. It currently costs Nelson Ltd $4 in direct materials, $23 in direct labour and $8 in variable overhead to manufacture each component. In addition $15 of fixed overhead is allocated to the cost of each component produced. Nelson Ltd can buy component X from an outside supplier for $39 each. In the short term Nelson Ltd cannot use component X manufacturing operations (which produces 10,000 units of component X per year) for an alternative activity and fixed costs will continue regardless of the usage of these manufacturing operations:

1. Determine whether Nelson Ltd should outsource the production of component X based on the financial information above and justify this determination by providing the net benefit or cost of outsourcing component X
2. Nelson Ltd has received an offer from a company seeking to rent the manufacturing operations for $160,000 per year. This company has also offered to cover 50% of the fixed overhead costs currently incurred each year in the manufacturing operation. Determine whether Nelson Ltd should accept the offer.
3. Identify and explain one advantage and one disadvantage of outsourcing.

Answer 1

Answer is given for Part 1 and Part 2