Nellie Ngubane recently became a B. Com graduate, specialising in working capital management. As a result of her excelle

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Nellie Ngubane recently became a B. Com graduate, specialising
in working capital management. As a result of her excellent
academic record, she was recruited by a recently established
private company. The company is in the retail sector and
specialises in the sale of designer bathtubs. Plans are in place to
establish branches in other major cities. As an upstart company, it
was unable to afford to employ separate managers for each of the
functional areas. So Nellie was employed as the manager who was
responsible for all aspects pertaining to the inventories and
debtors of the company. When she started her job at the company,
she discovered the following: The company was seeking to expand
rapidly and customer satisfaction was the priority. As a result,
credit was granted to as many of the applicants as possible and
adequate inventories were maintained in order to prevent stock-outs
from occurring. The average monthly demand for the bathtubs was
400. The selling price of the bathtubs was R7 500 and a mark-up of
50% on cost was used. All the sales are on credit and the credit
terms are 60 days. Collection costs of approximately R50 per unit
sold were incurred. The annual holding cost of a bathtub was 1% of
the cost of the item. The cost of placing an order for bathtubs was
R18.75. The cost of capital was 12%. Nellie has proposed the
following to the CEO: ¦ The company should take advantage of a 4%
discount from the manufacturer by ordering 100 bathtubs each time
instead of ordering the EOQ. ¦ A discount of 2.5% should be granted
to those customers who settle their accounts within 15 days. She
expects that this is likely to apply to 40% of the sales. How much
will the net annual saving be if the company takes advantage of the
4% manufacturer’s discount, as proposed by Nellie? Question 5 (9
Marks) Determine the expected annual profit to the company if
Nellie’s proposal of a 2.5% settlement discount to customers is
approved