ew their plans for the next six months in order to comply with this requirement. The following forecast information was prepared for the business some months earlier: May June July August September October November £000 £000 £000 £000 £000 £000 £000 Expected Sales 180 230 320 250 140 120 110 Purchases 135 180 142 94 75 66 57 Admin. expenses 52 55
Newtake Records Ltd owns three shops selling rare jazz and classical recordings to serious collectors. At the beginning of June, the business had an overdraft of £35,000 and the bank has asked for this to be eliminated by the end of November of the same year. As a result, the directors of the business have recently decided to review their plans for the next six
months in order to comply with this requirement.
The following
|
May |
June |
July |
August |
September |
October |
November |
|
|
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
Expected Sales |
180 |
230 |
320 |
250 |
140 |
120 |
110 |
|
Purchases |
135 |
180 |
142 |
94 |
75 |
66 |
57 |
|
Admin. expenses |
52 |
55 |
56 |
53 |
48 |
46 |
45 |
|
Selling expenses |
22 |
24 |
28 |
26 |
21 |
19 |
18 |
|
Tax payment |
|
|
|
22 |
|
|
|
|
Finance payments |
5 |
5 |
5 |
5 |
5 |
5 |
5 |
|
Shop refurbishment
|
- |
- |
14 |
18 |
6 |
- |
- |
Notes:
1 Inventories held at 1 June were £112,000. The business believes it is necessary to maintain a minimum inventories level of £40,000 over the period to 30 November of the same year.
2 Suppliers allow one month’s credit. The first three months’ purchases are subject to a contractual agreement that must be honoured.
3 The gross profit margin is 40 per cent.
4 All sales income is received in the month of sale. However, 50 per cent of customers pay with a credit card. The charge made by the credit card business to Newtake Records Ltd is 3 per cent of the sales value. These charges are in addition to the selling expenses identified above. The credit card business pays Newtake Records Ltd in the month of sale.
5 The business has a bank loan that it is paying off in instalments of £5,000 per month. The interest element represents 20 per cent of each instalment.
6 Administration expenses are paid when incurred. This item includes a charge of £15,000 each month in respect of depreciation.
7 Selling expenses are payable in the following month.
Required:
(a) Prepare a projected
(b) Compute the projected inventories levels at the end of each month for the six months to 30 November.
(c) Prepare a
(d) What problems is Newtake Records Ltd likely to face in the next six months? Can you suggest how the business might deal with these problems?
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