The Canine Food Company sells dog food in 10kg bags for $6.20 each. Sales for the first 3 months of 2018 are as follows:
The sales volume for December 2017 was 30,000 bags. Canine’s desired inventory is 30% of next month’s estimate in bags. All sales are cash sales. Canine purchases dog food bags at $4.70 and pays for them the month after purchase. General and administration expenses amount to $35,000 per month including $20,000 of depreciation. Canine pays for these expenses (excluding depreciation) in the same month they are incurred. January’s current liabilities to be paid in the same month amount to $71,500. Cash balance on 1 January 2018 is $75,000.
Prepare a cash budget for the months of January and February 2018. There is no need to sum up the two months. Show workings.
Prepare a projected income statement in contribution margin format for February 2018. How do you explain the difference between the profit in this income statement and the net cash flows from operations in the cash budget?
The dog food industry is highly competitive. Management of Canine is under pressure to improve profits and have decided to increase the price of dog food bags by 10% (assume no effect on quantities sold). Describe the effect of this strategy would have on each individual budget in the master budget and on the projected financial statements.