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Concept explainers
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
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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