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Case study (1) - profit and cash flow


Ecocity Cars Ltd

Ecocity has developed a new micro city car that runs on a petrol/electric system licensed from Honda. It knows from market research that there is a strong demand for the vehicle because of its small size and competitive pricing, and it is installing assembly capacity for up to 2,500 cars per month. It has prepared the following cost and revenue data for the first 6 months of sales of the car.

The selling price of each car is $25,000 each. Cars will be sold to specialised dealers on two months credit, initially.

Month 1 2 3 4 5 6 7 8 9
Sales forecast 10 30 100 200 500 1,000 1,200 1,400 1,600

Cars must be assembled two months before sale at this stage. When Ecocity become more established it will be able to cut this, and is planning for just-in-time assembly in year 2.

Costs are forecasted as follows:

Parts and materials: $10,000 per car, purchased and paid for one month before use.
Labour: $2,000 per car, paid for at the time of assembly
Overheads: $100,000 per week, paid as cash.


For the first 6 months of sales, prepare the following:

  • Cash flow forecast
  • Profit forecast

If Ecocity starts its operation and the first ordering of materials with $1 million in the bank, will it need an overdraft facility in this period? If so, how much should be asked for, and when?