AP Manufacturing Budget Management Project
| Instructions | |||||||||||
| The deliverable in this assignment is three Pro Forma Monthly Cash Flow Statements and a one page narrative. The narrative will discuss factors that could cause a deviation from the projection, and what steps could be taken to address any unfavorable deviations. See the “Key Assumptions” section to help identify these factors. Relevant project data and a template for the Pro Forma Cash Flow Statements are given below. | |||||||||||
| Project Background | |||||||||||
| AP Manufacturing is a specialty manufacture and has recently entered into a one year contract to produce product’s A and B. AP Manufacturing receives the order for the exact number of units at the beginning of each month, and manufactures and delivers all units before the end of that month. AP Manufacturing receives payment in full the month after product delivery. Materials must be purchased with cash. All employees are independent contractors, and are paid at the end of each month for hours worked. The project will run from January 1st through December 31st. Rent and electric bills are paid at the end of each month. AP Manufacturing’s beginning cash balance is $650,000. | |||||||||||
| Equipment Purchase and Loan Data | |||||||||||
| AP Manufacturing will incur one time equipment costs at the initiation of the project of $250,000. This will be partially financed with a $210,000 bank loan. The balance will be paid in cash. See the terms of the loan below; | |||||||||||
| Loan Information | |||||||||||
| Interest Rate: | 6.50% | ||||||||||
| Loan Term: 12 Months | 12 Months | ||||||||||
| Payment due date: | 28th of Each Month | ||||||||||
| The first 11 payments are interest only, the final payment includes that months interest and the loan principal. | |||||||||||
| Sales Forecast | |||||||||||
| AP Manufacturing is paid $245 per unit for product A and $475 per unit for product B. The number of units ordered is seasonal and varies based on demand. The below matrices estimate unit demand in above average, average, and below average economic conditions. To project unit demand in a particular month, take a weighted average of the three scenarios. Round to the closest unit. | |||||||||||
| Probability that economic conditions are above average | 30% | ||||||||||
| Probability that economic conditions are average | 40% | ||||||||||
| Probability that economic conditions are below average | 30% | ||||||||||
| Demand for Product A | Demand for Product B | ||||||||||
| January | January | ||||||||||
| Above Average Economy | 2,436 Units | Above Average Economy | 912 Units | ||||||||
| Average Economy | 2,014 Units | Average Economy | 740 Units | ||||||||
| Below Average Economy | 1,601 Units | Below Average Economy | 612 Units | ||||||||
| February | February | ||||||||||
| Above Average Economy | 2,577 Units | Above Average Economy | 900 Units | ||||||||
| Average Economy | 2,128 Units | Average Economy | 708 Units | ||||||||
| Below Average Economy | 1,644 Units | Below Average Economy | 580 Units | ||||||||
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Factors
In most cases, there is always a deviation from the projected income values in the actual values. The assumptions made in the forecast of the market demand and the purchase prices and the sale prices are likely to change. In this case of AP manufacturing where all the purchases and sales are paid on cash basis deviation factors would include changes in the material costs over the years. The material costs based on the market conditions at the beginning of the year. As the products demand is expected to raise so are the changes in the price of materials. For an increase in the material or labor costs, a negative deviation in the cash flow incomes will be noted…
(350 words)