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    Accounting:Ratio analysis.

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    You and five friends have decided to form a company to manufacture and distribute widgets. You have all agreed to provide £4,000 each to start the company. An initial marketing survey of past and present students has been undertaken as part of an MSc student project and the results of the study suggest that there is considerable interest for such a product.

    Based on this positive feedback from the marketing study you had agreed to prepare a business plan to present to the bank. Widgets Ltd will start trading on the 1st April 2010 with immediate expenditure on fixed assets. The following information about the first half year's trading has been forecast:

    Planned Expenditure on Fixed Assets
    Month Fixed Asset Asset Life (Years) £
    April Computer Equipment 2 3,000
    April Motor Vehicle 4 20,000
    April Plant and Equipment 10 12,000

    Note: The depreciation policy used by the company is the straight-line method. The assets will not have any scrap value at the end of their useful life.

    Forecast Sales Information
    Month Sales (units) Sales Invoiced £
    April 250 5,000
    May 250 5,000
    June 300 6,000
    July 450 9,000
    August 550 11,000
    September 700 14,000
    Total 2,500 50,000

    Estimated cash receipts and payments
    Month Sales Receipts £ Material Payments £
    April 0 0
    May 0 400
    June 4,000 500
    July 5,000 600
    August 6,000 800
    September 8,000 1,000
    Total 23,000 3,300

    Additional information

    ? The material cost of sales is £5,000 for the six months.
    ? Total material purchased from suppliers for the six months is £6,000
    ? Administration costs are £500 per month for the first three months and £1,000 per month from July onwards
    ? Sales and marketing costs are £600 per month
    ? Production overheads are £1,000 per month for the first three months and £2,000 per month from July onwards
    ? Rent is £2,800 per quarter and is paid in April and July
    ? Distribution costs are £1 per unit and paid in the month the unit is sold. For example £250 for April.
    ? Direct labour costs are £3 per unit sold and paid in the month the unit is sold. For example April is £750
    ? Corporation tax for the first six months is estimated to be £2,500 and will be paid in December 2010.

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    Solution Summary

    The problem set requires that a set of ratios be prepared from provided information.