a. The current sales of Pioneer Limited are $100 million.The company classifies its customers into 4 credit categories, 1 to 4.Credit rating diminishes as one goes from category 1 to 4.Pioneer presently extends unlimited credit to customers in category 1 and 2, limited credit to customers in category 3, and no credit to customers in category 4.As a result of this credit policy, the company is foregoing sales to the extent of $10 million to customers in category 4.The firm is considering the adoption of a liberal policy under which customers in category 3 would be extended unlimited credit and customers in category 4 would be extended limited credit.Such relaxation would increase the sales by $15 million on which bad debt losses would be 10%.The contribution margin ratio, (1-V) for the firm is 20%, average collection period, ACP, is 40 days, and the post-tax cost of funds, k, is 10% The tax rate is 40%.

Required:

Advise whether the company should change its credit standards.

[NB Use formula : RI = [S(1-V) - Sb_n] (1-t) - kI where I = S/360 x ACP x V]

(10 marks)

b. (i) The following data relate to a local manufacturing company:

U = annual sales=20 000 units

F= fixed costs=$2 000

P= purchase price per unit= $12

C= carrying cost= 25% of inventory valueRequired:

Calculate the economic order quantity.(5 marks)

(ii) Identify and explain any five factors that may influence the level of stock holding in a firm. (10 Marks)