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1.a. Prepare a monthly cash budget for the three months ending 30 September 2018. 12 Marks.
1.b. The owners were wondering what the effect would be on the cash position if they did not buy the new equipment, but instead took advantage of a new rental arrangement. The equivalent equipment would cost $10 000 per month under the rental arrangement. Redraft the cash budget to show the impact of the rental alternative. Based on the information available, should they lease or buy the equipment? 9 marks.
2.a. Calculate the break-even point in total units and units per product based on the 2018 data. 15 marks.
2.b. Calculate the before tax profit (loss) that would be achieved in 2018 based on the above data. This calculation relates to the information from question 2 only. 2 marks.
2.c. Management is concerned about competition for some of its trees, and wants to increase its sales of 3 years old trees relative to 1 year old trees. This initiative would increase annual fixed costs by $50 000 and alter the sales mix to 30 per cent for 2 years old trees, 30 per cent for 3 years old trees and 40 per cent for 1 year old trees. On the available data, would you recommend the initiative? Show workings. 15 marks.
3.a. What more financial information does the company owner need to make a decision? 2 mark.
3.b. Would you as the owner rely only on this information to make a decision? If not, why not? 2 mark.
3.c. If the calculated returns all exceed the entity's required minimum rate, which design would you recommend to the owner? Why? 3 marks.
The cash budget as prepared shows that when the equipment is purchased by the company, the cash position is not good in the first two months i.e. July and August. The company has negative cash balance of $74000 and $38200 in the months of July and August respectively. It means The Company will have to make arrangement for short term loans or overdraft facility in the first two months. In the third month, the company will have positive balance of cash.
On the basis of cash position analysis or on the basis of information given, the equipment taken on rental basis is a better option as the company does face cash crisis in any month. Therefore the company should take equipment on rental or lease basis.
However the company should also consider the life of asset also while taking the decision. The amount of depreciation should be compared with the rental payments and decision should be taken accordingly (Horngren, 2010). The availability of loan and interest rate should also be considered.