Kentucky Co is preparing a cash flow forecast for the three-month period from January to the end of March. The following sales volumes have been forecast:

December January February March April

Sales (units) 1,200 1,250 1,300 1,400 1,500

Notes:

1. The selling price per unit is $800 and a selling price increase of 5% will occur in February. Sales are all on one month's credit.

2. Production of goods for sale takes place one month before sales.

3. Each unit produced requires two units of raw materials, costing $200 per unit. No raw materials inventory is held. Raw material purchases are on one months' credit.

4. Variable overheads and wages equal to $100 per unit are incurred during production, and paid in the month of production.

5. The opening cash balance at 1 January is expected to be $40,000.

6. A long-term loan of $300,000 will be received at the beginning of March.

7. A machine costing $400,000 will be purchased for cash in March.

Required:

(a) Calculate the cash balance at the end of each month in the three-month period. (12 marks)

(b) Discuss the benefits of budgets(6 marks)

(c) Assuming that Kentucky Co expects to have a short-term cash surplus during the three-month period, discuss whether this should be invested in shares listed on a large stock market. (2 marks)