Notey Ltd is considering to offer an early settlement discount of 1.75% to its customers who...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Notey Ltd is considering to offer an early settlement discount of 1.75% to its customers who pay within 20 days and to increase the maximum credit period to 70 days. The company expects 25% of its customers will pay within 20 days whereas the remaining 75% will take an average of 70 days to pay. Annual credit sales of the company are currently Rs75 million. Credit customers are currently provided with 40 days credit facility but on average they take 15 days additional to pay. Following the change in trade receivables management, the company expects annual credit sales to increase by 10% and total annual fixed costs to increase by Rs800,000. The cost of short term finance of the company is 7.9% per annum and the contribution margin ratio is 30% Notey Ltd is also planning to make changes in its inventory management by adopting the economic order quantity model (EOQ) to determine the optimum order size. The annual demand for its Product 'Frigy' is 180,000 units. It has been ordering 10,000 units and the cost per order is currently Rs2,000 and the holding cost per unit is Rs20 per year. The company has decided to keep a buffer inventory of 5,000 units of 'Frigy irrespective of whether orders are made using the EOQ model or based on the current ordering policy. per order Required Comment whether the proposed changes in trade receivables management of Notey Ltd will increase the profitability of the company. Your answer must be supported with relevant calculations. (a) [7 marks] (b) Calculate the cost of the current ordering policy. [2 marks] (c) Comment whether the use of the EOQ model to determine order size is in the benefit of Notey Ltd. Your answer must be supported with relevant calculations. [4 marks] (d) Explain fully the different types of working capital financing policies. [6 marks] (e) Explain fully the differences between working capital investment policy and working capital financing policy. [6 marks] Page 5 of 9 Notey Ltd is considering to offer an early settlement discount of 1.75% to its customers who pay within 20 days and to increase the maximum credit period to 70 days. The company expects 25% of its customers will pay within 20 days whereas the remaining 75% will take an average of 70 days to pay. Annual credit sales of the company are currently Rs75 million. Credit customers are currently provided with 40 days credit facility but on average they take 15 days additional to pay. Following the change in trade receivables management, the company expects annual credit sales to increase by 10% and total annual fixed costs to increase by Rs800,000. The cost of short term finance of the company is 7.9% per annum and the contribution margin ratio is 30% Notey Ltd is also planning to make changes in its inventory management by adopting the economic order quantity model (EOQ) to determine the optimum order size. The annual demand for its Product 'Frigy' is 180,000 units. It has been ordering 10,000 units and the cost per order is currently Rs2,000 and the holding cost per unit is Rs20 per year. The company has decided to keep a buffer inventory of 5,000 units of 'Frigy irrespective of whether orders are made using the EOQ model or based on the current ordering policy. per order Required Comment whether the proposed changes in trade receivables management of Notey Ltd will increase the profitability of the company. Your answer must be supported with relevant calculations. (a) [7 marks] (b) Calculate the cost of the current ordering policy. [2 marks] (c) Comment whether the use of the EOQ model to determine order size is in the benefit of Notey Ltd. Your answer must be supported with relevant calculations. [4 marks] (d) Explain fully the different types of working capital financing policies. [6 marks] (e) Explain fully the differences between working capital investment policy and working capital financing policy. [6 marks] Page 5 of 9
Expert Answer:
Answer rating: 100% (QA)
a The proposed changes in Trade Receivable management of Notey Ltd shall definitely increase the Profitability by about Rupees 10 Lakhs as per the computations given below Additional profit being earn... View the full answer
Related Book For
Introduction to Accounting An Integrated Approach
ISBN: 978-0078136603
6th edition
Authors: Penne Ainsworth, Dan Deines
Posted Date:
Students also viewed these accounting questions
-
Refer to E6.17. If Kallsen gives customers who pay within the month of sale a 2 percent discount, does this change your answer? Why?
-
On 1 July 2015, Candy Ltd acquired all of the issued shares of Sweet Ltd. As part of the settlement, Candy Ltd agreed to pay $3,500,000 on 1 July 2015 and $1,650,000 payable on 1 July 2016. The...
-
Viking Horn Company received an advance payment of $162,000 for a consulting contract during the year. The balance in the Unearned Consulting Fees accounts at the beginning of the year was $12,000....
-
Alert Security Services Co. offers security services to business clients. The trial balance for Alert Security Services Co. has been prepared on the following end-of-period spreadsheet for the year...
-
Reconsider the loan application data in Table 7E.2. Set up the fraction nonconforming control chart for this process. Use the average sample size control limit approach. Plot the preliminary data in...
-
A transition of particular importance in 02 gives rise to the 'Schumann-Rung c band' in the ultraviolet region. The wave numbers (in cm-1) of transitions from the ground state to the vibrational...
-
The following control procedures over purchases and cash disbursements transactions are prescribed by the Merlin Company: 1. Approved purchase order for each purchase. 2. Prenumbered receiving report...
-
Midlife Shoes, Inc. is a manufacturer of sensible shoes for aging baby-boomers. The company is having great success, and although demand is seasonal, it is expected to increase steadily over the next...
-
What are some of the issues related to sustainability and packaging? Briefly identify and explain the issues that you have identified ?
-
Paul Poti, is the sole proprietor of Poti Enterprises, a small retail shop selling widgets located in Edmonton, AB. The shop has been in operation for several years. Paul provides you with the...
-
design a direct-mapped cache and draw it out. the cache capacity is 1024 X 1024 bytes. assume 1 block = 256 bytes. valid bit: 1 bit tag bits: 3 bits
-
Discuss the special challenges faced by companies when marketing products internationally.
-
Between August 1945 and July 1946, the number of Hungarian pengos (the unit of Hungarian currency) in circulation increased by a factor of 12,000,000,000,000,000,000,000,000, while the price level...
-
How does a product idea differ from a product concept and a product image? Where do these concepts fit in the new product development process?
-
What is a total market strategy, and why do marketers use this approach? Provide a recent example of a product or service that uses the total market strategy approach, and discuss the components that...
-
Define the essential nature of retailing and describe its function and role
-
m 1. Show directly that f(n) = n2 + 3n3 = O(n3). That is, use the definitions of O and to show that f(n) is in both O(n3) and Q(n3). Please use the formal definitions of Big-Oh, Theta, and Omega. You...
-
Could the owner of a business prepare a statement of financial position on 9 December or 23 June or today?
-
The following information was taken from the accounting records of Prentice Company for the years ended April 30: Required: Use a computer spreadsheet to do the following: A. Complete a vertical...
-
Refer to E8.16. Assume the company uses the gross price method and the perpetual inventory system.
-
Painter Supplies buys paint and supplies wholesale as needed for contracting jobs, but it also maintains a stock of paint and miscellaneous supplies. The accountant for Painter Supplies provided the...
-
A car rental agency uses 96 boxes of staples a year. The boxes cost \($4\) each. It costs \($10\) to order staples, and it costs \($0.80\) to hold a box of staples in inventory for 1 year. Using the...
-
Is the critical path the shortest or longest path through a project network?
-
PERT assumes that path lengths through a network can be modeled with what type of probability distribution?
Study smarter with the SolutionInn App