Assignment Task

Your Task:

1. a CVP analysis (monthly figures) and a brief interpretation that also highlights any major implication(s) for the business; 

2. a monthly cash budget for February to July (inclusive) based on initial forecasts and a brief interpretation that also highlights any major implication(s) for the business; and 

3. clarification of financing needs with suggested financing sources.

Scenario

Mandy Morrison is starting a business with a scheduled opening to customers on February 6th next year. She wants the business to begin making a monthly operating profit of $15,000 within the first six months of operation. The business is set up as a private company with Mandy as the sole shareholder. Mandy registered the company and paid the fee of $800 in early December. On 30th January, Mandy intends to open a company bank account with $10,000 plus the sum required to buy company assets.

Mandy’s business will sell beautiful crafted ornamental boxes sourced from local artisans and made from recycled precious timbers and inlaid with green fluorite. She intends to sell the boxes to jewellery and homeware stores for $120 per box. Projected monthly sales in units (boxes) are: 480 in January; 600 in February; 840 in March; 1,080 in April; and 1,200 each month after that. Thirty per cent of customers are expected to pay in the month of sale, 60% in the month after sale, and the remainder in the second month after sale.

Negotiations with suppliers have resulted in 12-month contracts starting in January that specify a $100 cost per unit for a monthly order of at least 40 units and payment to be made within 21-days of order. As the contracts also specify order delivery within one week, Mandy plans to order in the third week of each month, commencing in January, and pay at the end of the credit period. She will order the number of units that she expects the business to sell in the upcoming month.

Anticipated company operating expenses per month from February onwards, all of which will be paid for in the month incurred are: wages $6,200; utilities $1,200; insurance $2,900; and marketing $1,100. Additionally, quarterly rent payments of $6,000 for an office and storeroom will need to be made in advance, commencing in February.

A number of assets will be bought and paid for by the company on the first of February: office furniture at a cost $18,000 with a 10-year useful life; fixtures and fittings $12,000 with a 10- year useful life and computer equipment $10,000 with a 3-year useful life. None of the assets have any expected salvage value at the end of their useful lives and they will all be depreciated using the straight-line method.