MANAGING INVENTORIES AND DEBTORS Nellie Ngubane recently became a B. Com graduate, specialising in working capital manag
Posted: Wed Mar 30, 2022 3:43 pm
MANAGING INVENTORIES AND DEBTORS
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.
How much will the net annual saving be if the company takes
advantage of the 4% manufacturer’s discount, as proposed by
Nellie?
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.
How much will the net annual saving be if the company takes
advantage of the 4% manufacturer’s discount, as proposed by
Nellie?