Fitbury’s standard terms on sales invoices are 30 days, but analysis has shown that on average customers pay on 40 days.

Annual sales volume is 500,000 units generating sales of £10,000,000. The company expects irrecoverable receivables of £200,000 per annum.

Fitbury currently sell their products to retailers only, giving customers a 50% discount on the retail price. They are planning to sell direct to customers at the full retail price via a new website. Forecasts suggest that the overall total sales volume will increase by 10%, with sales to existing retailers decreasing to 400,000 units, the rest of the sales will instead come via the website at 100% of the retail price.

Sales direct to customers will incur additional variable costs of £2 per unit. This will be paid in the month that the expense is incurred.

Efficiencies in the supply chain will mean the 10% increase in volumes does not increase inventory levels or trade payables.

Retailers are expected to continue to pay on 40 days, however irrecoverable receivables are expected to decrease to £100,000 per annum.

Fitbury’s WACC is 12% per annum.

Required

1.Using the WACC how much will Fitbury save each year through the reduction in their working capital requirement under the new plan?

2. The plan to sell direct to consumers will cost £6m to implement. Fitbury expect any investments to achieve payback within two years. Should they go ahead with the plan? Show workings.

3. Fitbury use a combination of equity and non-current liabilities to finance their working capital, but a direct competitor uses short term finance such as bank overdrafts. Discuss the advantages and disadvantages of the two approaches.