Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children. At present, Plastic Toys is considering changing its supplier of plastic granules and has offered to buy its entire requirement of 2,000 kg a month from you at the going market rate, provided that you will grant it three months? credit on its purchases. The following information is available:1 P lastic granules sell for ?10 a kg, variable costs are ?7 a kg and fixed cost ?2 a kg.2 Your own business is financially strong, and has sales revenue of ?15 million a year. For the foreseeable future it will have surplus capacity and it is actively looking for new business.3 Your general manager has managed to obtain copies of Plastic Toys recent financial statements. Extracts from these are:

Required:Advise your general manager on the acceptability of the proposal. You should give your reasons and do any calculations you consider necessary.

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Year 3 (last year) Year 1 Year 2 £000 £000 £000 Sales revenue 980 640 800 Profit before interest and tax (150) 100 110 Capital employed 600 575 650 Current assets Inventories 220 320 200 Trade receivables 160 140 160 340 380 480 Current liabilities Trade payables 180 190 220 Overdraft 150 310 100 280 340 530 Working capital 40 (50) 60