(a). HIJ Ltd sells 3,000 tonnes of soil each year and demand is constant over time. The purchase cost of each tonne is $3 and the cost of placing and handling an order is estimated to be $5. The cost of holding 1 tonne of soil for one year is estimated to be $3. The business uses the EOQ model to determine the appropriate order quantity and holds no buffer inventories.

HIJ Ltd purchases the soil from the supplier on credit. It usually takes 60 days to pay the suppliers. Because of the recent economic issue, the supplier wants HIJ Ltd to pay within 30 days and offers 4% discount for early payment.

Required:

1.Calculate the cost of ordering in this product. (5 marks)

2. Calculate the approximate equivalent annual percentage cost of the 4% discount (2 marks)

3. Should HIJ Ltd accept the discount offer and pay its supplier within 30 days? Provide explain and justify your answers. (3 marks)

Hints: Show all calculations. Use simple interest.

(b)

KLM Ltd has credit sale revenue $5 million a year and bad debts to $10,000 a year. Customers usually take average 60 days to pay.

Its financial advisor suggests the manager of KLM Ltd to offer customers a cash discount of 3 per cent for prompt payment within 30 days. The financial advisor estimates 40 per cent of customers will accept this offer and pay the bill within 30 days, while 60 per cent of customers will still pay their bills until 60 days after the sale. KLM Ltd will pay extra $2,000 administration fees per year to manage the discount scheme.

KLM Ltd has overdraft facility with the interest rate at 4% p.a. If the plan is implemented, bad debts can reduce to $7,000 a year, and also reduce credit admin cost of $5,000.

1. Calculate the cost and saving of the discount plan (10 marks)

2. Should KLM Ltd implement the discount plan? Justify your answers with your calculations and any relevant internal and external factors (5 marks)