(a) A given company is planning to carry out two activities at the same time to...

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(a) A given company is planning to carry out two activities at the same time to determine the best credit policy for its customers,find out the optimal level of MILK from its suppliers. The following data have been collected to assist in making the decisions: 1. Annual requirements of milk are 4,100,000 litres 2. The carrying cost of the juice is Sh. 16 per litre per year 3. The cost of placing an order is Sh.5,400. 4. The required rate of return for this type of investment is 22% after tax. 5. Debtors currently are running at Sh. 50 million and have an average collection period of 30 days. 6. Sales are expected to increase by 30% if the credit terms are relaxed and to result in an average collection period of 90 days. 50% of sales are on credit. The gross margin on sales is 25% and is to be maintained in future. 7. 8. Required: (1) Use the inventory (Baumol) model to determine the economic order quantity and the (8 marks) ordering and holding costs at these levels per annum. (ii) Determine if the company should switch to the new credit policy. (4 marks) (a) A given company is planning to carry out two activities at the same time to determine the best credit policy for its customers,find out the optimal level of MILK from its suppliers. The following data have been collected to assist in making the decisions: 1. Annual requirements of milk are 4,100,000 litres 2. The carrying cost of the juice is Sh. 16 per litre per year 3. The cost of placing an order is Sh.5,400. 4. The required rate of return for this type of investment is 22% after tax. 5. Debtors currently are running at Sh. 50 million and have an average collection period of 30 days. 6. Sales are expected to increase by 30% if the credit terms are relaxed and to result in an average collection period of 90 days. 50% of sales are on credit. The gross margin on sales is 25% and is to be maintained in future. 7. 8. Required: (1) Use the inventory (Baumol) model to determine the economic order quantity and the (8 marks) ordering and holding costs at these levels per annum. (ii) Determine if the company should switch to the new credit policy. (4 marks)

Answer rating: 100% (QA)

1 Economic Order Quantity EOQ calculation EOQ 2DSH where D annual demand 4100000 litres S cost of pl... View the full answer