Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children. At present it is considering changing its supplier of plastic granules and has offered to buy its entire requirement of 2,000 kilos per month from you at the going market rate, providing that you will grant it 3 months’ credit on its purchases. The following information is available:

1 Plastic granules sell for £10 per kilo, variable costs are £7 per kilo and fixed costs £2 per kilo.

2 Your own company is financially strong and has sales of £15 million per year.

For the foreseeable future it will have surplus capacity and it is actively looking for new outlets.

3 Extracts from Plastic Toys accounts.

(a) Write some short notes suggesting sources of information you would use in order to assess the creditworthiness of potential customers who are unknown to you. You should critically evaluate each source of information.

(b) Describe the accounting controls you would use to monitor the level of your company’s trade debtors.

(c) Advise your general manager on the acceptability of the proposal. You should give your reasons and do any calculations you consider necessary.

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19X3 19X4 19X5 000 000 000 Sales 800 980 640 Profit before interest and tax 100 110 (150) Capital employed 600 650 575 Current assets Stocks Debtors 200 220 320 140 160 160 340 380 480 Current liabilities Creditors 180 Overdraft 100 280 Net current assets 60 g 190 220 150 310 340 530 40 (50)