Thore Co values, advertises and sells residential property onbehalf of its customers. The company has been...

 

Transcribed Image Text:

Thore Co values, advertises and sells residential property onbehalf of its customers. The company has been in business for only ashort time and is preparing a cash budget for the first four months of2006. Expected sales of residential properties are as follows. Month Units sold 2005 December 10 2006 2006 January February 10 15 2006 2006 March April 25 30 The average price of each property is $180,000 and Thorne Cocharges a fee of 3% of the value of each property sold. Thorne Coreceives 1% in the month of sale and the remaining 2% in the month aftersale. 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 20properties are sold in a given month, each employee is paid in thatmonth a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value ofeach property sold and these expenses are paid in the month of sale. Fixed overheads of $4,300 per month are paid in the month in which theyarise. Thorne Co pays interest every three months on a loan of $200,000at a rate of 6% per year. The last interest payment in each year is paidin 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 $15,000, for $20,000. The cash balance at thestart of January 2006 is expected to be a deficit of $40,000. Required: (a) Prepare a monthly cash budgetfor the period from January to April 2006. Your budget must clearlyindicate each item of income and expenditure, and the opening andclosing monthly cash balances. (10 marks) (b) Discuss the factors to be considered by Thorne Co when planning ways to invest any cash surplus forecast by its cash budgets. (5 marks) (c) Discuss the advantages anddisadvantages to Thorne Co of using overdraft finance to fund any cashshortages forecast by its cash budgets. (5 marks) (d) Explain how the Baumol model canbe employed to reduce the costs of cash management and discuss whetherthe Baumol cash management model may be of assistance to Thorne Co forthis purpose. Thore Co values, advertises and sells residential property onbehalf of its customers. The company has been in business for only ashort time and is preparing a cash budget for the first four months of2006. Expected sales of residential properties are as follows. Month Units sold 2005 December 10 2006 2006 January February 10 15 2006 2006 March April 25 30 The average price of each property is $180,000 and Thorne Cocharges a fee of 3% of the value of each property sold. Thorne Coreceives 1% in the month of sale and the remaining 2% in the month aftersale. 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 20properties are sold in a given month, each employee is paid in thatmonth a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value ofeach property sold and these expenses are paid in the month of sale. Fixed overheads of $4,300 per month are paid in the month in which theyarise. Thorne Co pays interest every three months on a loan of $200,000at a rate of 6% per year. The last interest payment in each year is paidin 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 $15,000, for $20,000. The cash balance at thestart of January 2006 is expected to be a deficit of $40,000. Required: (a) Prepare a monthly cash budgetfor the period from January to April 2006. Your budget must clearlyindicate each item of income and expenditure, and the opening andclosing monthly cash balances. (10 marks) (b) Discuss the factors to be considered by Thorne Co when planning ways to invest any cash surplus forecast by its cash budgets. (5 marks) (c) Discuss the advantages anddisadvantages to Thorne Co of using overdraft finance to fund any cashshortages forecast by its cash budgets. (5 marks) (d) Explain how the Baumol model canbe employed to reduce the costs of cash management and discuss whetherthe Baumol cash management model may be of assistance to Thorne Co forthis purpose.

Answer rating: 100% (QA)

a Thorne Co Cash Budget For the period January to April 2006 Income January 10 x 180000 1800000 February 15 x 180000 2700000 March 25 x 180000 4500000 ... View the full answer