| January | February | March | Total | Cash inflows: | | | | | Sales | 69 600 | 56 944 | 56 470 | 183 014 | Stock decrease | 5000 | 17 500 | - | 22 500 | Interest receivable | 0 | - | 155,05 | 155,05 | Total inflows | 74 600 | 74 444 | 56 625,05 | 205 669,05 | | | | | | Cash outflows: | | | | | Direct materials | 21 000 | 17 500 | 16 500 | 55 000 | Direct labour | 15 000 | 16 500 | 9 750 | 41 250 | Variable productionoverhead | 15 000 | 10 600 | 8 800 | 34 400 | Fixed productionoverhead | 2 000 | 2 000 | 2 000 | 6 000 | Admin. and selling costs | 15 000 | - | - | 15 000 | Equipment | - | - | 30 000 | 30 000 | Stock increase | - | - | 20 000 | 20 000 | Interest payable | 0 | (34) | - | 34 | Total outflows | 68 000 | 46 634 | 87 050 | 201 684 | | | | | | Net cash | 6 600 | 27 810 | (30 424,95) | 3 985,05 | Opening cash balance | (5000) | 1 600 | 29 410 | | Closing cash balance | 1 600 | 29 410 | (1 014,95) | |

(a) Our calculations: (50%) 10 000$ - December a) January 50 000$ 20 000$ (40% PC) – direct materials (50%) 10 000$ - January

11 000$ - January February 55 000$ 22 000$ - DM 11 000$ - February

6 500$ - February March 32 500$ 13 000$ - DM 6 500$ - March

(50%) 10 000$ - March April 50 000$ 20 000$ (40%) – direct materials (50%) 10 000$ - April

The creditor in 10 000$ from December for direct materials we pay in January. b) January 15 000$ ( 30% PC) – direct labour February 16 500$ (30%) – direct labour March 9 750$ (30%) – direct labour c) January : the remainder of production cost (15 000$) – fixed overhead ( 5 000$, from which 3 000$ is depreciation, that we do not include in our CB) = variable overhead ( 10 000$) (40%) 4 000$ - January (60%) 6 000$ - February

February : the remainder of production cost (16 500$) – fixed overhead ( 5 000$, from which 3 000$ is depreciation, that we do not include in our CB) = variable overhead ( 11 500$)

(40%) 4 600$ - February (60%) 6 900 – March

March : the remainder of production cost (9 750$) – fixed overhead ( 5 000$, from which 3 000$ is depreciation, that we do not include in our CB) = variable overhead ( 4 750$)

(40%) 1 900$ - March (60%) 2 850$ - April e) Also creditors on 1 January 20X9 are expected to be:
Direct materials: 10 000$
Production overheads: 11 000$ (60% of production overhead in December that we will pay in January).

i) Interest payable/receivable in January equals 0, since the bank balance on 1 January (31 December) is (5 000) $ and the bank balance on 1 December 2008 is 5000$, so according to the formula the interest payable/receivable in January is 0.

The interest payable in February is:
(-5000+1600)/2 = -1700, 2% per month – (34)$.

The interest receivable in March is:
(1 600+29 410)/2 = 15 505, 1% per month - 155,05$.

(b) Having drawn up the cash budget, we can see that we have cash deficit in March in the amount of (1 014,95)$ that occurred mainly due to the capital equipment purchase (purchased in February, but payable in March) costing 30 000$. We suggest that management should negotiate with production department (or any other responsible for capital equipment purchases) the following issue – whether they really need to purchase this equipment now, or it could be postponed for some period in future. Since it is much easier to solve the one-off problem than to deal with generic systematic problems. Another possible solution for the management is – to estimate the possibility of financing this equipment differently, not in cash, in order not to produce cash deficits and overdrawn balances. And one more possibility – to finance this equipment in such a way – 50% in March and another 50% in April (of course if they expect the required cash inflows), and of course, they should negotiate this with the company supplying this equipment.