Thorne Co. values, advertises and sells residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of 2013. Expected sales of residential properties are as follows.

The average price of each property is £180 000 and Thorne Co.
charges a fee of 3 per cent of the value of each property sold. Thorne Co. receives 1 per cent in the month of sale and the remaining 2 per cent in the month after sale. The company has nine employees who are paid on a monthly basis. The average salary per employee is £35 000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of £140 for each additional property sold.
Variable expenses are incurred at the rate of 0.5 per cent of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of £4300 per month are paid in the month in which they arise. Thorne Co. pays interest every three months on a loan of £200 000 at a rate of 6 per cent per year. The last interest payment in each year is paid in December.
An outstanding tax liability of £95 800 is due to be paid in April. In the same month Thorne Co. intends to dispose of surplus vehicles, with a net book value of £15000, for £20 000. The cash balance at the start of January 2012 is expected to be a deficit of £40 000.
Required:

(a) Prepare a monthly cash budget for the period from January to April. Your budget must clearly indicate each item of income and expenditure, and the opening and closing monthly cash balances.

(b) Discuss the factors to be considered by Thorne Co. when planning ways to invest any cash surplus forecast by its cash budgets.

(c) Discuss the advantages and disadvantages to Thorne Co. of using overdraft finance to fund any cash shortages forecast by its cash budgets.

Transcribed Image Text:

2012 2013 2013 Month December January February Units sold 10 10 15 2013 2013 March April 25 30