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:

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

2 Your own business is financially strong and has sales revenue of £15 million 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 Operating profit (Profit loss 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 Overdraft 100 150 310 280 340 530 Working capital 60 40 (50)

Required:

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

AppendixLO1