% of sales sales $

a) The annual costs incurred:

Materials 30% 1,500,000 450,000
Labour 25% 1,500,000 375,000
Variable overhaeds 10% 1,500,000 150,000
Fixed overheads 15% 1,500,000 225,000
Selling and distribution 5% 1,500,000 75,000

b) the average value of current assets:

% completed months complete $
Raw materials 3 450,000

WIP
Materials 50% 2 450,000 37,500
Labour 50% 2 375,000 31,250
Variable overheads 50% 2 150,000 12,500

Finished goods
Materials 1 450,000 37,500
Labour 1 375,000 31,250
Variable overheads 1 150,000 12,500

Debtors 2.5 1,500,000

c) Average value of current liabilities:

Materials 2 450,000 75,000
Labour - 50 weeks 1 375,000 7,500
Variable overheads 1 150,000 12,500
Fixed overheads 1 225,000 18,750
Selling and distribution 0.5 75,000 3,125

d) Working capital required

 $
112,500

81,250

81,250

312,500
587,500

(116,875)
470,625
 Current policy Option A Option B
Annual expenditure on debt collection 240,000 300,000 400,000
Bad debt losses (% of sales) 3% 2% 1%
Average collection period (months) 2 1.5 1

Credit sales for the year 4,800,000 4,800,000 4,800,000

Cost for obtaining working capital 15% 15% 15%

Current policy Option A Option B

Average debtor (4,800,000/2/12) 800,000 600,000 400,000
4800000/12x2 4800000/12x1.5 4800000/12x1
Reduction in working capital 200,000 400,000
800,000-600,000 800,000-400,000
(a) Interest saving (15% of reduction) 30,000 60,000
200,000x15% 400,000x15%
Bad debt losses (sales value) 144,000 96,000 48,000
4,800,000x3% 4,800,000x2% 4,800,000x1%
(b) Reduction in losses 48,000 96,000
144,000-96,000 144,000-48,000
Benefits of each option (a) + (b) 78,000 156,000
30,000 +48,000 60,000 + 96,000
Extra costs of debt collection (60,000) (160,000)
300,000-240,000 400,000-240,000
Benefit/loss from option 18,000 (4,000)
We take the first option 78,000-60,000 156,000-160,000
because Benefit > cost
 SEP OCT NOV DEC JAN
£ £ £ £
PAYMENTS Why 2,000 in NOV, not OCT: because of 1 month's credit: pay in cash one month l
Purchases on credit 5000 2,000 4,000
3000:150X100 6000:150X100 6000:150X10010,500:150X100
SUPPLIERS = COST OF SALES (1 month's credit) 5,000 2000 4,000 4,000
RUNNING EXPENSES 1,600 1,600 1,600 1,600
DRAWINGS 1,000 1,000 1,000 1,000
7,600 4,600 6,600 6,600
RECEIPTS
sales on credit 3,000 6,000 6,000 10,500
DEBTORS (no credit) 0 0 6,000 10,500

SURPLUS/SHORTFALL (7,600) (4,600) (600) 3,900

(=RECEIPTS- PAYMENT )
OPENING BALANCE 7,000 (600) (5,200) (5,800)
(15,000-8,000)

CLOSING BALANCE (600) (5,200) (5,800) (1,900)

IS THIS PROFIT OR LOSS?

IS THIS TABLE A STANDARD FORM?
Point (d) says: sale price = cost of sales x 150%, so if sales for Oct is 3,000, cost of sale for OCT = 3,000/150% = 2,
Point (d) says: sale price = cost of sales x 150%, so if sales for NO is 6,000, cost of sale for OCT = 6,000/150% = 4,
 FEB MAR
£ £
edit: pay in cash one month later

10,500:150X100
10,500:150X100
7,000 7,000
1,600 1,600
1,000 1,000
9,600 9,600

10,500 10,500
10,500 10,500 10,500 10,500

900 900

(1,900) (1,000)

(1,000) (100)

for OCT = 3,000/150% = 2,000

for OCT = 6,000/150% = 4,000
 SEP OCT NOV DEC JAN
£ £ £ £
PAYMENTS Why 2,000 in NOV, not OCT: because of 1 month's credit: pay in cash one month l
3000:150X100 6000:150X100 6000:150X10010,500:150X100
SUPPLIERS = COST OF SALES (1 month's credit) 5,000 2000 4,000 4,000
RUNNING EXPENSES 1,600 1,600 1,600 1,600
DRAWINGS 1,000 1,000 1,000 1,000
7,600 4,600 6,600 6,600
RECEIPTS
DEBTORS (2 months' credit) 0 0 3,000 6,000

SURPLUS/SHORTFALL (7,600) (4,600) (3,600) (600)

(=RECEIPTS- PAYMENT )
OPENING BALANCE 7,000 (600) (5,200) (8,800)
(15,000-8,000)

CLOSING BALANCE (600) (5,200) (8,800) (9,400)

IS THIS PROFIT OR LOSS?

IS THIS TABLE A STANDARD FORM?
Point (d) says: sale price = cost of sales x 150%, so if sales for Oct is 3,000, cost of sale for OCT = 3,000/150% = 2,
Point (d) says: sale price = cost of sales x 150%, so if sales for NO is 6,000, cost of sale for OCT = 6,000/150% = 4,
 FEB MAR
£ £
edit: pay in cash one month later
10,500:150X100
10,500:150X100
7,000 7,000
1,600 1,600
1,000 1,000
9,600 9,600

6,000 10,500 Err:520

(3,600) 900

(9,400) (13,000)

(13,000) (12,100)

for OCT = 3,000/150% = 2,000

for OCT = 6,000/150% = 4,000