Management control and economics / financial management

You are employed in an accounting firm and have a corporate customer who has set up a profit budget for June 2020. The customer has budgeted a solid profit for June, but knows from previous experience that June is a month with large payments that puts pressure on liquidity in the company. The customer therefore asks you to perform the following tasks:

1) Prepare liquidity budget for June 2020

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2) Prepare budgeted balance as of 30 June 2020

3) The company currently has an approved overdraft loan from the bank of NOK 1,000,000, of which they have used NOK 800,000. Will the company need to increase the overdraft facility based on the liquidity budget for June, and possibly by how much? Justify your answer (feel free to round up to the nearest 100,000).

4) The company is a group with two divisions; division East and division West. Division West wants to buy 5,000 units of the product that Division East manufactures. Division West can choose to either buy the product from Division East or in the external market. Division East sells the product for NOK 175 per unit and has a variable unit cost of NOK. 125.

a. What should the transfer price of the product be if the East division has full capacity utilization?

b. What should the transfer price for the product be if the East division has spare capacity?

 

 

Performance budget June 2020
 

Sales revenue

 

2,400,000

Cost of goods 900 000
Wage costs 120,000
Depreciation 225 000
Other operating expenses 450 000
Operating profit 705 000
Interest expense 10,000
Ordinary profit before tax 695 000
 

Balance pr. May 31, 2020

 
Assets 31.05.2020
   
Total fixed assets 1,750,000
 

Warehouse

 

2,600,000

Accounts receivable 1,600,000
Total current assets 4,200,000
   
Total Assets 5,950,000

 

Equity and debt 31.05.2020
 

Share capital

 

200,000

Other equity 600 000
Total equity 800 000
   
Long term debt 1,600,000
 

Overdraft

 

800 000

Accounts payable 650 000
Due holiday pay 1,200,000
Due and accrued employer’s contribution 100,000
VAT due 550 000
Debt due 250 000
Total short-term debt 3,550,000
   
Total equity and debt 5,950,000

 

You have also received the following information for June in order to set up a liquidity budget and balance sheet budget:

  • Sales revenues are budgeted at NOK 2,500,000. Sales are distributed evenly throughout the month and the average credit period is 15 days. All sales are in Norway.
  • Items in order are a total of NOK 1,000,000 excl. VAT, the goods are delivered evenly through June. The average credit period is 15 days.
  • The inventory is estimated at 2,700,000 as of 30 June 2020.
  • VAT is 25%, employer’s tax is 14.1% and holiday pay is 12%. Payable VAT for the 3rd term is due for payment on 10 June 2020. Payable employer’s tax for

The third term is due for payment on 15 July 2020. Holiday pay is paid in June.

  • Since the holiday pay is paid in June, no ordinary salary is paid except for holiday substitutes. Salary costs for the holiday substitutes in June are budgeted at NOK 120,000. All salaries are paid in the same month as accrued.
  • Linear depreciation for June will be NOK 225,000 .
  • Other operating costs for June are budgeted at NOK 450,000 excl. VAT. Due for payment the same month as accrued.
  • Interest and installments totaling NOK 25,000 on long-term debt are due for payment on 15 June. The installment amounts to NOK 15,000.
  • The company will invest in a new IT system for NOK 100,000 excl. VAT Payment to the IT supplier will take place on 5 June.
  • At the general meeting held in May, it was decided that NOK 250,000 of last year’s profit will be paid as a dividend in June 2020.
  • Prerequisite: any liquidity surplus / deficit must be used to reduce / increase the overdraft facility. Also ignore taxes.

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