Case Study Skonto Plc

Skonto Plc has an annual credit sales of 4.2 million and cost of sales 1.89 million . Current assets consist of inventory and accounts receivable. Current liabilities consist of accounts payable and an overdraft with an average interest rate of 7% p.a. The company give 2 months credit to its customers and is allowed, on average, one months credit by trade suppliers. It has an operating cycle of 3 months.

Other relevant information: Current ratio of Skonto Plc: 1.4 Cost of long term-finance of Skonto Plc: 11%

You are required (A):

A. Calculate the size of the overdraft of Skonto Plc, the net working capital of the company and the total cost of financing its current assets.

Comments for (A). Calculate inventory period, then value of inventory, then current assets, current liabilities and so on and calculate requested!

Skonto Plc wishes to minimise its inventory costs. Annual demand for raw material costing 12 per unit is 60,000 units p.a. Inventory management costs for this raw material are as follows:

Ordering cost: 6 per order

Holding cost: 0.50 per unit per year The supplier of this raw material has offered a bulk purchase discount of 1% for orders of 10,000 units or more. If bulk purchase orders are made regularly, it is expected that annual holding cost for this raw material will increase to 2 per unit per year.

You are required (B): B. (B.1.) Calculate the total cost of inventory for the raw material when

using the economic order quantity.

Comment. EOQ? Inventory cost? Total inventory cost with EOQ policy?

(B.2.) Determine whether accepting the discount offered by the supplier will minimise the total cost of inventory for raw material. Your conclusion?