Notey Ltd is considering to offer an early settlement discount of 1.75% to its customers who...

 

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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

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