Week 7 Workshop Example Harmison is setting up a company to make sports wear. He plans first of all to make two types of cricket boot, the ‘Fair Play (FP)’ boot which has a rubber sole and the ‘Dubious Conduct (DC)’ boot which has metal spikes in the sole. He knows that the first few months of a business are crucial to its success and he wants to draw up some plans for the first six months of trading. He will be selling to large retail chains who have asked for 60 days credit. In turn he has managed to negotiate 30 days credit from his materials suppliers. All other amounts will be paid for in the month they are incurred. He will manufacture to order and all goods are manufactured in the month they are delivered. In the same way all materials are purchased in the month they are consumed.

Fair Play Dubious Conduct

Selling Price (£) 10 14 Materials (£) 3 5 Labour hours per pair 15 minutes 30 minutes Forecast Demand (pairs) Month 1 1,000 400 Month 2 1,200 600 Month 3 1,300 700 Month 4 1,400 800 Month 5 1,600 1,000 Month 6 1,400 700

He is renting a small manufacturing unit and will be paying £4,000 for the first six months rent this is payable in advance. He is also leasing the necessary machinery at a cost of £800 per month. Marketing and advertising costs will total £3,000 and will be incurred equally across the first three months of the start up. He will be paying a manager £2,000 per month and Insurance of £2,000 for this period is payable at the start of trading. He is paying for his labour on a piece rate basis and this will be equivalent to £9 per hour if the standard production times are adhered to. You are required to:

a) calculate the contribution of both the Fair Play and the Dubious Conduct

b) Work out the Full Cost of per pair for both products on the basis of a

Labour Hour overhead recovery rate

c) Work out the break even volume and the margin of safety for both the Fair Play and Dubious Conduct assuming that overheads are allocated using the Labour Hour recovery rate

d) Work out the profit or loss for the first six months of trade

e) Work out the cash budget for the first six months of trade