What problems is Newtake Records Ltd likely to face in the next six months? Can you suggest how the business might deal with these problems?

Newtake Records Ltd owns a chain of 14 shops selling DVDs and CDs. At the beginning of June the business had an overdraft of £35,000 and the bank had asked for this to be eliminated by the end of November. As a result, the directors have recently decided to review their plans for the next six months.

The following plans were prepared for the business some months earlier:

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Notes:

(i) The inventories level at 1 June was £112,000. The business believes it is preferable to maintain a minimum inventories level of £40,000 of goods over the period to 30 November.

(ii) Suppliers allow one month’s credit. The first three months’ purchases are subject to a contractual agreement, which must be honoured.

(iii) The gross profit margin is 40 per cent.

(iv) All sales proceeds are received in the month of sale. However, 50 per cent of customers pay with a credit card. The charge made by the credit card business to Newtake Records Ltd is 3 per cent of the sales revenue value. These charges are in addition to the selling expenses identified above. The credit card business pays Newtake Records Ltd in the month of sale.

(v) The business has a bank loan, which it is paying off in monthly instalments of £5,000. The interest element represents 20 per cent of each instalment.

(vi) Administration expenses are paid when incurred. This item includes a charge of £15,000 each month in respect of depreciation.

(vii) Selling expenses are payable in the following month.

Required (working to the nearest £1,000):

(a) Prepare a cash budget for the six months ending 30 November which shows the cash balance at the end of each month.

(b) Compute the inventories levels at the end of each month for the six months to 30 November.

(c) Prepare a budgeted income statement for the whole of the six months period ending 30 November. (A monthly breakdown of profit is not required.)

(d) What problems is Newtake Records Ltd likely to face in the next six months? Can you suggest how the business might deal with these problems?

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