| Garden Supply Company | ||||||||||
| Cash Budget | ||||||||||
| For the quarter ending 30 September, 2018 | ||||||||||
| Particulars | Amount ($) | |||||||||
| Opening balanace | 1,06,826 | |||||||||
| Add: Receipts | ||||||||||
| Proceeds from cash sales | 1,22,104 | |||||||||
| Proceeds from receipt from accounts receivable | 97,546 | |||||||||
| Proceeds from receipt of loan | 20,000 | 2,39,650 | ||||||||
| Less: Payments | ||||||||||
| Payment for wages | 60,080 | |||||||||
| Payment for purchase of office furniture | 12,109 | |||||||||
| Payment for prepaid expenses | 4,722 | |||||||||
| Payment for administrative expense | 18,818 | |||||||||
| Payments to Accounts Payable | 69,110 | |||||||||
| Prepayments – Other | 1,597 | 1,66,436 | ||||||||
| Closing balance | 1,80,040 | |||||||||
| (a) | Calculation of contribution margin: | |||||||||
| Contribution Margin = Sales – Variable Costs | ||||||||||
| Particulars | Selling price | Variable cost/unit | Contribution margin | |||||||
| 1 year old | $15 | 10 | $5 | |||||||
| 2 years old | $25 | 16 | $9 | |||||||
| 3 years old | $40 | 25 | $15 | |||||||
| Calculation of sales mix: | ||||||||||
| Particulars | Sales mix | Sales mix ratio | ||||||||
| 1 year old | 2,45,000 | 0.55 | ||||||||
| 2 years old | 1,25,000 | 0.28 | ||||||||
| 3 years old | 75,000 | 0.17 | ||||||||
| Calculation of weighted average cost margin for each product: | ||||||||||
| Particulars | 1 year old | 2 years old | 3 years old | Total | ||||||
| Sales mix | 2,45,000 | 1,25,000 | 75,000 | 4,45,000 | ||||||
| Selling price | $15 | $25 | $40 | |||||||
| Variable cost/unit | 10 | 16 | 25 | |||||||
| Contribution margin | $5 | $9 | $15 | |||||||
| Weighted average contribution margin for each product | $2.75 | $2.53 | $2.53 | $7.81 | ||||||
| Total contribution margin | $34,75,000 | |||||||||
| Less: Fixed expenses | $3,51,900 | |||||||||
| Total profit | $31,23,100 | |||||||||
| Weighted average cost margin for each product | $7.02 | |||||||||
| Calculation of break even point: | ||||||||||
| Break even point (in units) | = | Fixed expenses / 7.81 | ||||||||
| = | 351900 / 7.81 | |||||||||
| = | 45,058 | |||||||||
| Break even point (in units) product wise | ||||||||||
| – 1 year old | = | (351900 / 7.81) x (245000 / 445000) | ||||||||
| = | 24,807 | |||||||||
| – 2 years old | = | (351900 / 7.81) x (125000 / 445000) | ||||||||
| = | 12,657 | |||||||||
| – 3 years old | = | (351900 / 7.81) x (75000 / 445000) | ||||||||
| = | 7,594 | |||||||||
| (b) | Calculation of sales as per revised sales mix | |||||||||
| Particulars | 1 year old | 2 years old | 3 years old | |||||||
| New Sales Mix | 40% | 30% | 30% | |||||||
| Total sales | 4,45,000 | 4,45,000 | 4,45,000 | |||||||
| New Sales | $1,78,000 | $1,33,500 | $1,33,500 | |||||||
| New fixed cost | = | 351900 + 60000 | ||||||||
| = | $ 4,11,900 | |||||||||
| Calculation of profit (loss) based on new sales mix | ||||||||||
| Particulars | 1 year old | 2 years old | 3 years old | Total | ||||||
| Sales mix | 1,78,000 | 1,33,500 | 1,33,500 | 4,45,000 | ||||||
| Selling price | $15 | $25 | $40 | |||||||
| Variable cost/unit | 10 | 16 | 25 | |||||||
| Contribution margin | $5 | $9 | $15 | |||||||
| Total contribution margin | $8,90,000 | $12,01,500 | $20,02,500 | $40,94,000 | ||||||
| Less: Fixed costs | $ 4,11,900 | |||||||||
| Total profit | $36,82,100 | |||||||||
| Profit as per existing sales mix | = | $31,23,100 | ||||||||
| Increase in profit | = | 3682100 – 3123100 | ||||||||
| = | $ 5,59,000 | |||||||||
| Advise: | ||||||||||
| Since revised sales mix will increase the profit by $559,000, hence the management should opt for new initiative. | ||||||||||
| (a) | Calculation of NPV of small truck, if funds can earn 5% | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | |||||
| Cash flows | -$ 1,26,500 | $ 63,400 | $ 57,400 | $ 47,000 | $ 57,300 | |||||
| PVF @ 5% | 1.00000 | 0.95238 | 0.90703 | 0.86384 | 0.82270 | |||||
| PV | -$ 1,26,500 | $ 60,381 | $ 52,063 | $ 40,600 | $ 47,141 | |||||
| NPV | = | ######## | ||||||||
| (b) | Calculation of NPV of small truck, if funds can earn 8% | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | |||||
| Cash flows | -$ 1,26,500 | $ 63,400 | $ 57,400 | $ 47,000 | $ 57,300 | |||||
| PVF @ 8% | 1.00000 | 0.92593 | 0.85734 | 0.79383 | 0.73503 | |||||
| PV | -$ 1,26,500 | $ 58,704 | $ 49,211 | $ 37,310 | $ 42,117 | |||||
| NPV | = | ######## | ||||||||
| (c) | Advise basis NPV | |||||||||
| Management should purchase the small truck as NPV is greater than zero in both the cases. | ||||||||||
| (d) | Calculation of payback period | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | |||||
| Cash flows | -$ 1,26,500 | $ 63,400 | $ 57,400 | $ 47,000 | $ 57,300 | |||||
| Cumulative Cash flows | -$ 1,26,500 | -$ 63,100 | -$ 5,700 | $ 41,300 | $ 98,600 | |||||
| Payback period (in years) | = | 2.12 | ||||||||
| Advise basis payback period | ||||||||||
| The management should not purchase the truck as actual payback is 2.12 years and required payback is 2 years. | ||||||||||
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