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On-line Budget & Bid Assignment

Learning outcomes

▪ You will be able to develop a budget for the coming year.

▪ You will re-price a job from the previous year using the correct margins to meet your new budget.

▪ You will complete a cash flow forecast for the new job.

For ease of reference please download and print out the entire assignment and fill in the word form on your computer.

Once Completed, please email your assignment to your instructor. You can verify who your instructor is by reviewing your registration email!

Please bring your completed assignment to the workshop for further analysis.

BUDGET & BID ASSIGNMENT

Zorro Ltd.

Situation

You are the President of Zorro Ltd. a residential renovation company. You have considered the previous year's annual balance sheet, and profit and loss statement, and agree on the following goals.

1. The company will aim for a 25% Return on Net Worth (Equity) in the latest year. In the previous year, the Net Worth (Equity) was $200,000 at the beginning of the year.

2. Assume inflation will have the following effects:

□ Materials and Sub-trades will increase by 5%

□ Labour and Staff salaries will increase by 3%

□ General overhead will increase by 2%

3. The manager's salary for the coming year is to be $60,000, compared to $50,000 last year.

4. Assume zero income taxes.

Assignment

1. Develop a budget and new pricing policies based on the above information.

2. Bid the first job of the new year.

3. Prepare an Income Statement (Profit & Loss Statement) for the 4 months.

a. The job you have bid is the only one you have

b. You will complete the job in 4 months

c. Direct cost and overhead will be incurred evenly over the 4 months

d. You will invoice the client 25% of the selling price at the end of each month

5. Complete a cash flow forecast for this job

a. The new job will be completed over four months with equal expenditure each month

b. Labour will be paid in the month incurred all other expenditures will be paid in the following month. (Ignore holdback and taxes)

c. Revenue will be received in four equal installments starting in month 2

|ZORRO LTD. |

|INCOME STATEMENT |

| |Previous Year | |Latest Year | |

|Sales |$1,955,000 |100.0% |$ |100.0% |

|Cost of sales | | | | |

| Materials & sub-trades |750,000 |38.4% | |% |

| Labour |875,000 |44.8% | |% |

|Total Cost of sales |1,625,000 |83.1% | |% |

|Gross profit |330,000 |16.9% | |% |

|Overhead | | | | |

| Manager's salary |50,000 |2.6% | |% |

| Other salaries |70,000 |3.6% | |% |

| General overhead |150,000 |7.7% | |% |

|Total overhead |270,000 |13.8% | |% |

|Pre-tax profit |$60,000 |3.1% | |% |

STEPS

1. Using the Income Statement and the notes complete the Budget & Pricing Policy Schedule (on the next page (2-4)) for the PREVIOUS Year first.

2. Then complete the Budget & Pricing Policy Schedule for the LATEST year.

HINT: Watch the trap. What is the net worth for the latest year? Remember you were given the figure for the beginning of the previous year. How has that number changed?

3. After you have completed the Budget & Pricing Policy Schedule complete the Income Statement.

4. Then complete the Bid Worksheet; then the Income Statement by month and then the cash flow forecast.

|ZORRO LTD. |

|BUDGET & PRICING POLICY |

|Budget |Previous Year |Latest Year |

|Net worth |$ |$ |

|Return on investment | % | % |

|Pre-tax Profit |$ |$ |

|Materials & sub-trades |$ |$ |

|Labour |$ |$ |

|Total direct cost + |$ |$ |

|Manager's salary |$ |$ |

|Other salaries |$ |$ |

|General overhead |$ |$ |

|Total overhead + |$ |$ |

|Overhead as % of direct cost | % | % |

|Break-even sales = |$ |$ |

|Pre-tax profit + |$ |$ |

|Total sales = |$ |$ |

|Profit ÷ sales | % | % |

|Profit ÷ break-even sales | % | % |

|NEW PRICING POLICY | | |

|Direct cost | |$ |

|+ Overhead mark-up | % |$ |

|= Break-even sales | |$ |

|+ Profit mark-up on Break-even | % |$ |

|= Sales revenue |$ |

Note: Round off $ to nearest whole dollar.

Note: Round off % to first decimal place.

Bid Worksheet

The first job of the new year is a job that was bid the previous year, but it did not proceed, and is being re-tendered with no change in design.

|ZORRO LTD. |

|Bid Worksheet |

| |Previous Year's Bid |This Year's Bid |

|Materials & sub-trades |$50,000 |$ |

|Labour |$60,000 |$ |

|Total direct cost |$110,000 |$ |

|Overhead/direct cost |16.6% | % |

|Overhead |$18,260 |$ |

|Break-even sales |$128,260 |$ |

|Profit/break-even sales |3.2% | % |

|Profit |$4,061 |$ |

|Total bid |$132,321 |$ |

Note: Round off $ to nearest whole dollar.

Note: Round off % to first decimal place.

CASH FLOW FORECAST

What would your cash flow forecast on the new job (see page 2-5) look like based on the following parameters?

▪ The job is completed over 4 months – with 25% of it completed in each month.

▪ All costs are allocated equally over the four months.

▪ Labour is paid for in the month incurred.

▪ All other costs are paid in the ensuing (following) month.

▪ You invoice the customer in 4 equal monthly installments at the end of each month. (Payment received in subsequent months.)

Income Statement by Month

|Income Statement (Profit & Loss Statement) |

|  |Month 1 |Month 2 |Month 3 |Month 4 |Total |

|Materials & Sub-trades | | | | | |

|Labour | | | | | |

|Total Direct | | | | | |

|Overhead | | | | | |

|Operating profit | | | | | |

Cash Flow Forecast

|Cash in | | | | | | |

| | | | | | | |

|Cash out | | | | | | |

| |Month 1 |Month 2 |Month 3 |Month 4 |Month 5 |TOTAL |

|Labour | | | | | | |

|Materials/subs | | | | | | |

|Overhead | | | | | | |

|Total outflow | | | | | | |

| | | | | | | |

| | | | | | | |

Net cash flowCumulative

Hint: The cumulative cash flow should equal the profit.

Complete the Income Statement first and then the Cash Flow Forecast.

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FINANCIAL MANAGEMENT

ASSIGNMENT 2

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