The management of Shujaa Packers Ltd. 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 ordering orange juice from its suppliers.

The following data have been collected to assist in making the decisions:
1.
Annual requirements of orange juice are 2,100,000 litres

2.
The carrying cost of the juice is Sh.8 per litre per year

3.
The cost of placing an order is Sh.1,400.

4.
The required rate of return for this type of investment is 18% after tax.

5.
Debtors currently are running at Sh.60 million and have an average collection period of 40 days.

6.
Sales are expected to increase by 20% if the credit terms are relaxed and to result in an average collection period of 60 days.

7.
60% of sales are on credit.

8.
The gross margin on sales is 30% and is to be maintained in future.


Determine:
The economic order quantity      
The ordering costs
The holding costs                  
If the company should switch to the new credit policy.

Answer rating: 100% (QA)

SOLUTION Certainly Heres the stepbystep calculation and analysis for determining the economic order quantity EOQ ordering costs holding costs and whether the company should switch to the new credit po... View the full answer