Nellie Ngubane recently became a B. Com graduate, specialising in working capital management. As a result of her excelle
Posted: Wed Mar 09, 2022 9:06 am
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
at 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.
Question One
a) Comment on the working capital policy of the company. (4
marks)
b) Calculate the annual ordering costs based on the EOQ. (5
marks)
c) Calculate the annual profit to the company, without
considering Nellie’s proposals. (4 marks)
d) How much will the net annual saving be if the company
takes advantage of the 4% manufacturer’s discount, as proposed by
Nellie? (8 marks)
e) Determine the expected annual profit to the company if
Nellie’s proposal of a 2.5% settlement discount to customers is
approved. (9 marks)
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
at 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.
Question One
a) Comment on the working capital policy of the company. (4
marks)
b) Calculate the annual ordering costs based on the EOQ. (5
marks)
c) Calculate the annual profit to the company, without
considering Nellie’s proposals. (4 marks)
d) How much will the net annual saving be if the company
takes advantage of the 4% manufacturer’s discount, as proposed by
Nellie? (8 marks)
e) Determine the expected annual profit to the company if
Nellie’s proposal of a 2.5% settlement discount to customers is
approved. (9 marks)