4. The labour union of Empire plc announced a strike commencing at the beginning of week 3 thatwill last 4 weeks. This means production will stop at the end of week 2. Empire plc intends tocontinue sales in week 4 selling all finished products from inventory. The inventory level offinished products at the beginning of week 1 is 1200 units (there is no inventory of partlyfinished goods).The budgeted sales and production levels for week 1-3 are given below:Week 1Week 2Week 3Budgeted salesBudgeted production 1200 units800 units1000 units800 units800 unitsThe budgeted standard manufacturing cost (per unit) is given below:(£)Direct materials30Direct labour14Variable overhead16Fixed overhead36The company uses a full absorption costing system and the overhead absorption rate is basedon a budgeted fixed overhead of £36,000 per week (including £2,800 depreciation). During thestrike Empire will not incur any labour or variable costs and fixed costs per week reduce by£6,000.The current inventory of raw materials is worth £15,000 and this will rise to £22,000 by the endof week 1 and remain at this level during the strike.Direct materials and direct labour expenses are paid one week after they are incurred.Overhead costs are paid when incurred. Empire sells their product at £120 and receives 70% 1 week after sales and 30% 2 weeks aftersales. They currently have a £32,000 outstanding bill from their material suppliers (due in week1) and a £12,800 unpaid wages bill in respect of their labour force (due in week 1). Receivablesare £124,800 (£96,000 due in week 1, the remainder due in week 2).REQUIRED:(a) Prepare a cash budget for week 1-6 showing the balance of cash at the end of eachweek. The cash balance at the start of week 1 is £2,000.(c) Comment on the credit period the company gives to customers. The marketing managerdid a study and found that sales could increase if credit was extended by another week.Evaluate this option and mention the trade-off involved. (No calculations reauired).

Cash Budget The purpose of preparing the cash budget to know the cash movement which are involved to…

REQUIRED: (a) Prepare a cash budget for week 1-6 showing the balance of cash at the end of each week. The cash balance at the start of week 1 is £2,000. (c) Comment on the credit period the company gives to customers. The marketing manager did a study and found that sales could increase if credit was extended by another week. Evaluate this option and mention the trade-off involved. (No calculations reauired).

REQUIRED: (a) Prepare a cash budget for week 1-6 showing the balance of cash at the end of each week. The cash balance at the start of week 1 is £2,000. (c) Comment on the credit period the company gives to customers. The marketing manager did a study and found that sales could increase if credit was extended by another week. Evaluate this option and mention the trade-off involved. (No calculations reauired).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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