Question

QUESTION 1
Wisliv Ltd was incorporated on the 01/06/16. The opening balance sheet of the company was as follows: Cash at bank GHS984000, share capital (60,000 ordinary shares of GHS 16.40 each) GHS984,000.
During June the company intends to make payments of GHS 656,000 for a freehold property,            GHS 164,000 for equipment and GHS98,400 for a motor vehicle. The company will also purchase an initial trading stock costing GHS360,800 on credit.
    The company has produced the following estimates:
i. Sales for June will be GHS131,200 and will increase at the rate of GHS49,200 per month until September. In October, sales will rise to GHS360,800 and this will be maintained for the subsequent months.

ii. The gross profit margin on goods sold will be 25%.

iii. There is a risk that supplies of trading stock will be interrupted towards the end of the accounting year. The company, therefore, intends to build up initial level of stock (GHS 360,800) by purchasing GHS 16,400 of stock each month in addition to the monthly purchases necessary to satisfy monthly sales. All purchases of stock (including the initial stock will be on one month’s credit).

iv. Sales will be divided equally between cash and credit sales. Credit customers are expected to pay two months after the sale is agreed.

v. Wages and salaries will be GHS 14,760 per month. Other overheads will be GHS8,200 per month for first four months and GHS 10,660 thereafter. Both types of expenses will be payable when incurred.


vi. 80% of sales will be generated by sales people who will receive 5% commission on sales. The commission is payable one month after the sale is agreed. The company intends to purchase further equipment in November 2016 for GHS 11,480 cash.

vii. Depreciation is to be provided at the rate of 5% per annum on freehold property and 20% per annum on equipment. (Depreciation has not been included in the overheads mentioned above in (v) above.


Required
Prepare a cash budget for Wisliv Ltd. for the six month period to 30/11/16.

Question 2
The Sock company buys hiking socks for GHS6 per pair and sells them GHS10. Management budgets monthly fixed costs of GHS12,000 for sales volume between 0 and 12,000 pairs.

Required
Consider the following questions separately by using the foregoing information each time.
i. Calculate the breakeven point in units.

ii. The Sock Company reduces its sales price from GHS10 per pair to GHS8 per pair. Calculate the new breakeven point in units.


iii. The Sock Company finds a new supplier for the socks. Variable costs will decrease by GHS1 per pair. Calculate the breakeven point in units.

iv. The Sock Company plans to advertise in hiking magazines. The advertising campaign will increase total fixed costs by GHS2,000 per month. Calculate the new breakeven point in units.

v. In addition to selling hiking socks, the Sock Company would like to start selling sports socks. The Sock Company expects to sell one pair of hiking socks for every three pairs of sports socks. The Sock Company will buy the sports socks for GHS4 per pair and sell them for GHS8 per pair. Total fixed costs will stay at GHS12,000 per month. Calculate the breakeven point in units for both hiking socks and sports socks.

Answer 1

Cash Budget for Wisliv Ltd for the six month period to30/11/2016
	June	July	August	September	October	November
Budgeted Sales	131,200	180,400	229,600	278,800	360,800	360,800
Cash sales	65,600	90,200	114,800	139,400	180,400	180,400
Cash collection from credit sales			65,600	90,200	114,800	139,400
Total cash receipts	65,600	90,200	180,400	229,600	295,200	319,800
Cash Outflow
Cash Payment for Inventory	-	377,200	151,700	188,600	225,500	287,000
Wages and salaries	14,760	14,760	14,760	14,760	14,760	14,760
Other overheads	8,200	8,200	8,200	8,200	10,660	10,660
Sales Commission		5,248	7,216	9,184	11,152	14,432
Cash outflow for operation	22,960	405,408	181,876	220,744	262,072	326,852
Capital expenditure
Freehold property	656,000
Equipment	164,000					11,480
Motor vehicle	98,400
Total capital expenditure	918,400	-	-	-	-	11,480
Total cash outflow	941,360	405,408	181,876	220,744	262,072	338,332
Net Cash Inflow	(875,760)	(315,208)	(1,476)	8,856	33,128	(18,532)
Beginning Cash Balance	984,000	108,240	(206,968)	(208,444)	(199,588)	(166,460)
Ending Cash Balance	108,240	(206,968)	(208,444)	(199,588)	(166,460)	(184,992)
Inventory Budget
	June	July	August	September	October	November
Budgeted cost of goods sold	98400	135300	172200	209100	270600	270600
Monthly inventory required		135300	172200	209100	270600	270600
Addittional inventory purchase	16400	16400	16400	16400	16400	16400
Initial Trading inventory	360800
Monthly Purchase	377200	151700	188600	225500	287000	287000
Cash payment for inventory		377200	151700	188600	225500	287000