Business finance : theory and practice

Problems
Month Production (gnomes) Sales volume (gnomes)
November 700 700
December 800 800
January 1,000 800
February 1,200 1,000
March 1,200 1,200
April 1,400 1,300
May 1,500 1,400
June 1,500 1,600
The selling price for each gnome will be £10. The raw materials will cost £4 per
gnome; wages and other variable costs are expected to be £3 per gnome.
Salaries and other fixed overheads are expected to amount to £1,400 per month
during November and December, to rise to £1,600 per month from January to April
(inclusive), and to increase to £2,000 per month for May and June.
Sixty per cent of sales are made on a cash basis (paid on delivery). The remainder
are on credit, customers being expected to pay in full in the second month after the
sale.
Payment for raw material purchases will be made one month after delivery, and
materials will be held in stock for one month before they are used in production.
Wages and other variable costs will be paid during the month of production.
Salaries and other fixed overheads will be paid 80 per cent in the month in which they
are incurred and 20 per cent in the following month.
To promote the expanded sales volume, an advertising campaign is to be undertaken.
This will involve payments to the advertising agency of £1,000 in January and
£1,500 in April.
A new machine, to help cope with the increased production, has been ordered,
and it should be delivered in February. The agreement is to pay the £6,000 for the
machine in three equal instalments of £2,000 each in March, April and May.
Arcadia Ltd intends to pay a dividend of £600 to its shareholders in April. It expects
to have a bank current account balance (in funds) of £7,500 on 1 January.
Produce a cash budget for the first six months of next year, showing the net cash position
at the end of each month.
13.4 Antithesis Ltd sells its service on credit at the rate of £6 million a year. Customers take
varying lengths of time to pay, but the average is 65 days. The business does not
experience any significant level of bad debts because it spends £50,000 a year on
trade receivables collection procedures.
Antithesis Ltd is considering a proposal to introduce a cash discount of 2 per cent
of the amount due if customers pay within 30 days of the sale. It is estimated that 60
per cent of customers would pay on the thirtieth day and claim the discount. The
remaining customers would be the slower payers, and they would be expected to take
an average 75 days to pay. The cost of trade receivables collection procedures would
be expected to fall to £20,000 a year. The cost of funds to finance the trade receivables
is 12 per cent p.a.
In terms of effect on net profit (after interest, before tax), should the proposed trade
receivables policy be introduced?
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