 A garden supply company has the following business transaction estimates relating to the third quarter of 2018.
Credit Sales 160960
Cash Sales 122104
Receipts from Accounts Receivable 97546
Wages 60080
Office Furniture 12109
Prepayments 4722
Administrative Expense 18818
Depreciation on Office Furniture 1454
Depreciation on PPE 35000
Provision for doubtful debts 1454
Receipt of Loan 20000
Credit Purchases 85450
Payments of Accounts Payable 69110
Accrued Wages and other expenses 9854
Prepayments  Other 1597
The cash balance at 1 July 2018 was $106826.
Required
Prepare a cash budget for the quarter ending 30 September 2018. Note that 1 mark will be deducted for each incorrect posting to the cash budget.
 The garden supply company is considering introducing various aged trees to their product range in 2019. They have provided the following information relating to its planned activities.
I year old 2 years old 3 years old
Sales mix 245,000 125,000 75,000
Selling price $15 $25 $40
Variable cost/unit 10 16 25
Total fixed cost = $351,900
Required
 Calculate the contribution margin, sales mix and weighted average cost margin for each product. Also calculate the breakeven point in total units and units per product based on the 2019 data.
 Management is concerned about competition for some of its trees, and wants to alter its sales mix of trees. The total number of trees forecast to be sold remains as per question 2a. This initiative would increase annual fixed costs by $60 000 and alter the sales mix to 40 percent for 1 year old trees, 30 per cent for 2 years old trees and 30 per cent for 3 years old trees . On the available data, would you recommend the initiative Show workings.
 The garden supply company is also considering buying a small truck which costs $126 500 and is expected to earn annual net cash inflows of $63 400, $57 400, $47 000 and $39 900, before it wears out sufficiently to be unreliable and must be sold for an estimated $17 400.
Required
 If funds can earn 5 per cent, what is the small trucks NPV
 If funds earn 8 per cent, what is the small trucks NPV
 Advise management on your recommendation regarding purchase of the small truck subsequent to your NPV calculations.
 What advice would you give management if the required payback period was two years
Show calculations for a, b and d.
Answer:
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Garden Supply Company 

For the quarter ending 30September2018 

Particulars 

Amount 


Cash balance 01July2018 
$106,826 

Receipts 

Cash Sales 
$122,104 

Receipts from Accounts Receivable 
$97,546 

Receipt of Loan 
$20,000 
$239,650 


Payments 

Wages 
$60,080 

Office Furniture 
$12,109 

Prepayments 
$4,722 

Administrative Expense 
$18,818 

Payments of Accounts Payable 
$69,110 

Prepayments  Other 
$1,597 
$166,436 


Cash balance 30September2018 
$180,040 
Solution
Particulars 
1 year old 
2 years old 
3 years old 
Selling price 
$15 
$25 
$40 
Variable cost/unit 
10 
16 
25 
Contribution margin 
$5 
$9 
$15 
Sales mix = 245,000:125,000:75,000
= 0.55:0.28:0.17
Particulars 
1 year old 
2 years old 
3 years old 
Sales mix (a) 
0.55 
0.28 
0.17 
Contribution margin (b) 
$5 
$9 
$15 
Weighted average contribution margin for each product (a x b) 
$2.75 
$2.53 
$2.53 
Total weighted average contribution margin = $2.75 + $2.53 + $2.53
= $7.81
Total contribution margin = (245,000 + 125,000 + 75,000) x $7.81
= 445,000 x $7.81
= $3,475,000
Total profit = Total contribution margin – Fixed assets
= $3,475,000  $351,900
= $3,123,100
Weighted average cost margin for each product = Total profit / Total sales
= $3,123,100 / 445,000
= $7.02
Breakeven point (in units) = Fixed costs / 7.81
= 351900 / 7.81
= 45,058
Breakeven point (in units) product wise
= (Fixed costs / Total weighted average contribution margin) x (Sales / total sales)
1 year old = (351900 / 7.81) x (245000 / 445000)
= 24,807
2 years old = (351900 / 7.81) x (125000 / 445000)
= 12,657
3 years old = (351900 / 7.81) x (75000 / 445000)
= 7,594
(b)
Total profit = Total contribution margin – Fixed assets
= $3,475,000  $351,900
= $3,123,100
New sales mix for 1 year old = 40% x 445000
= 178000
New sales mix for 2 years old = 30% x 445000
= 133500
New sales mix 3 years old = 30% x 445000
= 133500
New fixed cost = Old fixed cost + additional costs
= 351900 + 60000
= $411,900
Particulars 
1 year old 
2 years old 
3 years old 
Sales mix (a) 
178,000 
133,500 
133,500 
Contribution margin (b) 
$5 
$9 
$15 
Total contribution margin (a x b) 
$890,000 
$1,201,500 
$2,002,500 
Total contribution margin = $890,000 + $1,201,500 + $2,002,500
= $4,094,000
Total profit = Total contribution margin – Fixed costs
= $4,094,000  $411,900
= $3,682,100
Increase in profit due to change in sales mix = $3,682,100  $3,123,100
= $559,000
Change in sales mix leads to increase in profit. Therefore, management should accept this new initiative.
Solution 3
Cost of small truck = $126,500.00
Salvage value of truck = $17,400.00
Year 
Cash flows 
Present Value Factor @ 5% 
Present Value of cash flows 
0 
$126,500.00 
1.00000 
$126,500.00 
1 
$63,400.00 
0.95238 
$60,380.95 
2 
$57,400.00 
0.90703 
$52,063.49 
3 
$47,000.00 
0.86384 
$40,600.37 
4 
$57,300.00 (39900 + 17400) 
0.82270 
$47,140.85 

$73,685.66 
NPV = $73,685.66
Year 
Cash flows 
Present Value Factor @ 8% 
Present Value of cash flows 
0 
$126,500.00 
1.00000 
$126,500.00 
1 
$63,400.00 
0.92593 
$58,703.70 
2 
$57,400.00 
0.85734 
$49,211.25 
3 
$47,000.00 
0.79383 
$37,310.12 
4 
$57,300.00 
0.73503 
$42,117.21 

$60,842.28 
NPV = $60,842.28
NPV is positive in both of above cases. Therefore, management should purchase trucks in both of above cases.
(d)
Year 
Cash flows 
Cumulative Cash flows 
0 
$126,500.00 
$126,500.00 
1 
$63,400.00 
$63,100.00 
2 
$57,400.00 
$5,700.00 
3 
$47,000.00 
$41,300.00 
4 
$57,300.00 
$98,600.00 
Payback period = 2 + (5700 / 47000)
= 2.12 years
Actual payback period is 2.12 years whereas requirement is to have payback period of maximum 2 years. Therefore, based on this criteria, management should not purchase truck.
This problem has been solved.
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