The Economic Climate Practice Questions

Item A

Brampton Joinery Ltd designs and fits kitchens for homeowners in Wakefield. Gareth Pryce owns the business with his sister Ana and it employs 14 people. A fitted kitchen costs a customer an average of £9 500 and most customers pay a deposit and then pay the rest in instalments over 24 months.

The business uses a £60 000 overdraft to pay for timber, worktops and wages while it waits for customers' instalments to arrive. Over the last year the base rate of interest has risen from 3% to 5.5% and the bank has increased the interest charged on the overdraft. Orders fell by 12% last year, as homeowners delayed spending on home improvements.

The bank has now offered Brampton Joinery Ltd a five-year loan of £60 000 at a fixed rate of interest, with equal monthly repayments, to repay the overdraft.

Item B

Table 1: Forecast cash flow for Brampton Joinery Ltd for March

	£
Opening balance	(2 400)
Total cash inflows	38 000
Cash outflows
Materials	16 500
Wages	14 200
Overdraft interest	900
Other overheads	5 100

Figures in brackets are negative.

Item A: Penrose Kitchens

Penrose Kitchens is a small business based in Falmouth, Cornwall. It is owned by Zara Penrose, who designs and fits kitchens in customers' homes. A complete kitchen costs between £6 000 and £14 000. Zara employs four people.

When she started the business, Zara took out a £40 000 bank loan to buy a van and to convert a barn into a workshop. The loan has a variable rate of interest, which has risen from 3% to 5.5%. Interest is charged on the full £40 000. Zara also offers her customers finance, so that they can pay for a kitchen in monthly instalments over three years rather than all at once. The company that provides this finance has increased the interest it charges those customers.

Zara is deciding whether to borrow a further £15 000, at the same variable rate, to buy a second van so that two kitchens could be fitted at the same time.

Figure 1 shows the number of kitchens Penrose Kitchens fitted in each quarter of last year.

Figure 1: Kitchens fitted by Penrose Kitchens last year

Item A: Kirkbeck Autos

Kirkbeck Autos is a used car dealership in Doncaster, owned by Kieran Bowe as a sole trader. It sells around 20 cars a month at prices between £3 000 and £12 000, and also runs a four-bay workshop which services and repairs cars for local drivers. Kieran employs two mechanics and a sales assistant.

About 70% of customers do not pay the full price for their car in cash. Instead they use a finance agreement, arranged by Kieran with a finance company, and pay a fixed amount each month for three or four years. The finance company has raised the interest it charges on new agreements. Kieran also has a £25 000 bank loan, which he used to buy the stock of cars on his forecourt. The interest rate on this loan is variable.

Over the past year interest rates have risen from 4% to 6%. The prices Kieran pays at the car auctions he buys from have not fallen, and he has noticed that more customers are asking about the cheaper cars on the forecourt.

Table 1 shows the number of cars sold by Kirkbeck Autos in the first four months of the year.

Table 1

Month	Number of cars sold
January	21
February	18
March	24
April	15

Item B: Kirkbeck Autos

The workshop is fully booked most weeks. Kieran is considering taking out a further £20 000 bank loan, at the same variable rate, to build two more bays in the workshop.

Item A: Coast Cabins Ltd

Coast Cabins Ltd is a private limited company owned by Rhian Evans. It rents out six wooden holiday cabins on a hillside in Pembrokeshire. A cabin costs £520 a week in the peak summer season and £320 a week at other times of the year. Rhian employs two part-time cleaners from the nearby village.

Three years ago Rhian borrowed £90 000 on a variable interest rate to build two extra cabins. The interest rate on the loan has risen from 3% to 5.5%, which has increased the interest she pays each year from £2 700 to £4 950.

UK consumer incomes have fallen over the last year and several large employers in west Wales have made workers redundant. At the same time the pound has fallen in value against the euro, which makes a holiday in Europe more expensive for UK families.

Rhian wants to repaint all six cabins and add hot tubs, but she is worried about how the changing economic climate will affect her bookings. Adding a hot tub to every cabin would cost £18 000, which she would need to borrow.

Figure 1 shows the number of cabin weeks booked at Coast Cabins last year. Each quarter has 78 cabin weeks available.