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, Plastic Toys is considering changing its supplier of plastic granules and has offered to buy its entire requirement of 2,000 kg a month from you at the going market rate, provided that you will grant it three months’ credit on its purchases. The following information is available:

16.4 16.3 651 CHAPTER 16 MANAGING WORKING CAPITAL 1 Plastic granules sell for £10 a kilogram, variable costs are £7 a kilogram, and fixed costs

£2 a kilogram.

2 Your own business is financially strong, and has sales revenue of £15m a year. For the foreseeable future it will have surplus capacity, and it is actively looking for new outlets.

3 Extracts from Plastic Toys’ financial statements:

Year 1 Year 2 Year 3

£000 £000 £000 Sales revenue 800 980 640 Profit before interest and tax 100 110 (150)

Capital employed 600 650 575 Current assets Inventories 200 220 320 Trade receivables 140 160 160 340 380 480 Current liabilities Trade payables 180 190 220 Short-term borrowings (overdraft) 100 150 310 280 340 530 Required:

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