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Chapter 18 Mini-Case 9: Winter Woollies Manufacturing

Winter Woollies Manufacturers (WWM) have a seasonal sales pattern, with high sales
in the second quarter of the year. They also experience a minor sales peak in
December due to a special contract with a customer in the northern hemisphere. It is
the beginning of January 2008. The sales pattern for the coming eight months,
together with the sales for the past quarter, is shown in the table below:
October

100 000

April

150 000

November

120 000

May

200 000

December

180 000

June

240 000

January

150 000

July

162 000

February

120 000

August

120 000

March

140 000

WWM's terms of sale are 2/30 net 60. Their actual experience of collections is that 30
percent of customers take the discount, 60 percent pay in 60 days and 10 percent pay
in 90 days. Bad debts have never exceeded 0,2 percent of sales.
Production costs, equal to 60 percent of expected sales, consist of labour (25 percent
of expected sales) and bought out materials (35 percent of expected sales). Labour is
paid in the same month as the labour expense is incurred. Materials are paid for in the
second month following purchase.
Office salaries of R30 000 are paid in the month they are incurred. Depreciation on
non-current assets is R5 000 per month. Other expenses, expected to remain at
R22 000 per month for the whole year, are paid in the month following that in which
they are incurred.
The firm's term loan, which at the end of December 2007 stood at R300 000 attracts
interest at a fixed rate of 16 percent per annum, calculated quarterly. The loan, which
is being repaid in equal quarterly instalments, has 6 years to run.
In May the firm will be buying a new computer, for R15 000. WWM estimates its
second provisional tax payment, due in February will be R20 000. Its next payment,
expected to be R23 000, will be at the end of August. The firm's tax rate is 30 percent.
Your mother, the owner of WWM, is getting worried that with the recent growth in
the firm, cash may run out in the near future. She asks you to prepare a cash budget
through to the end of August.
While you are in her office, the production manager, Ignatius Mailula drops in. He
has come to complain about the difficulty of running a factory that produces
seasonally. He says he has to let staff go in the quiet periods and has difficulty finding
experienced people for the busy months. He wants to switch from seasonal
production, where goods are made to order, to level production, where the
manufacturing for the anticipated sales for the coming year are spread evenly across
the year.
You immediately point out that this may have cash flow implications, but Ignatius,
not having any financial knowledge cannot understand what you are getting at. Your
mother therefore asks you to redo the cash budget for the eight-month period based on
the assumption of level production.