Case study (1) - profit and cash flow
A company produces and sells DVD's to the Retail Trade. The firm sells packs of 10 DVD's, at a cost of $100 per pack. The cost to the company, per pack, are summarised below:
Labour $10 per pack
Materials $15 per pack
Overheads and expenses $25 per pack
All costs are paid in cash as they are incurred. Sales may be made for cash or on 4 weeks credit.
At the start of the period the firm has $100,000 in the bank, and has built up a profit of $250,000.
Calculate the profit made on the sale of a pack of DVD's.
Examine the actions described below and calculate the effect of them on the firm's cash flow and profit position. You are advised to use the pro-forma stock chart and cash book by clicking on this link: [Pro-forma].
In month 1 the firm makes 10,000 packs, but sells 5,000 packs for cash. Show the impact of these transactions on cash, profit and stock levels.
In month 2, the firm makes another 15,000 packs, but sells 7,000 packs on one month free credit.
In month 3, the firm makes another 15,000 packs, but sells 10,000 packs for cash and 5,000 on one month free credit.
In month 4, the firm makes another 10,000 packs, but manages to sell only 7,000 packs, then only on one month free credit.
In month 5, the firm makes another 15,000 packs, but sells 5,000 packs for cash and 10,000 on one month free credit.
In month 6, the firm makes only 5,000 packs, but sells 7,000 packs on one month free credit, and 13,000 packs for cash.