Question

301.20 University Glercise Finance & x is a business that trades only over the internet. In the lato year, the company had sales of sus million. All sales were on 30 days credit to commercial customers. Extracts from the company's most recent balance sheet relating to working capital are as follows: 5200 5000 Trade Receivables 2 466 Trade Payables 2220 Overdraft 3000 In order to encourage customers to pay on time, & proposes to in vodant an early settlement disbunt of 1 for payment within 30 days, while increasing its normal credit period to Hsdays. It Sempered thaton Overige, 50. of customers will take the discount and pay within 30 days, 30/0 of customers pay after 45 days and 20.10 pof customers will not change their current paying behaviour. X currently orders 15000 units per month of product 2, demand for which is constant. There is only one supplier of Product 2 and the cost of Product 2 purchases over the last year was 15400oo. The supplier has offered a reto di 2% discount for orders of product 2 of 30000 units or more. Each order costs & siso to place and the holding cost is 24 cents per unit per year. & has an overdraft facility charging interest of 6./o per year. ca) Calculate the nat benefit or cost of prqosed changes in Trade receivables (policy and comment on your findings (6) Calculate whether the bulk purchase discount offered by the supplier is financially. acceptable and comment on the assumptions made by,

Please answer the following questions and all its parts. Failure to do so will result in negative rating. Try answering on a piece of paper if possible and scan it please and i will give good rating. Thanks!

Answer 1

(A) Calculation of Benefit or Cost of Proposed change in Trade Receivables

Assumptions :- 1.This year Sales will be the same as that of last year sales i.e. Rs. 15 Millions. 2. Interest Rate = 6% 3.In old policy for Trade Receibale customers paid after 30 days credit

Costs Incurred due to change in policy of Trade Receivables

i. Discount Given for payment within 30 days =$15 Mill. * 50 % * 1% = $75,000

ii. Extra interest cost for 15 days for 30% of customers who pay after 45 days =$4.5 Mill*15/365*6% = $11096

Total Extra Cost to be incurred = $75000 + $11096 = $86096

Savings Due to change in policy of Trade Receivables

Interest Savings due to 50% of customers paying within 30 days = 15 Mill. * 50 % * 30/365 *6% = $36,986

(Assuming that full 30 days interest will be saved )

Total Savings = $ 36,986

As we can see that total cost incurred will be $86096 whereas savings will be $ 36,986 as such the new policy for Trade Rreceivables is not advisable.

(B) The Economic Order Quantity will be = Square root of ( 2 * 1,80,000 * 150)/ 0.24 = 15, 000 units

Per unit cost of Product Z = $ 540,000/180,000 = $3

Assumption : 30,000 products only will be ordered at a time

Total Discount if 30,000 products are ordered at a time = $540000*2% = $10800

Savings in ordering Cost if 30,000 units are ordered at a time = 6* $150 = $ 900

Total savings = $10,800 + $ 900 = $11,700

Extra Interest Cost to be Incurred for ordering 30,000 units at once = 15,000 units * $3 * 6/12 * 6% = $1350

Extra Holding Cost to be incurred = 15,000 units * 6/12 * 0.24 = $1800

Total Extra Cost to be incurred = $ 1350 + $ 1800 = $ 3150

Thus as we can see as the total savings is $ 11,700 whereas the total Extra Cost is $ 3150 it is Financially Viable to go for discount on bulk purchase.