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help IKEO Ltd is a manufacturer of home decoration that has been set up since 1999. IKEO Ltd achieved sales of RM5 million for the
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IKEO Ltd is a manufacturer of home decoration that has been set up since 1999. IKEO Ltd achieved sales of RM5 million for the year ending 31 December 2007. Sales have not increased over the past three years, and the sales forecast prepared by the marketing department suggests that there will be no change in the forthcoming year. All sales are on credit and trade debtors are expected to pay one month after being invoiced. However, trade debts outstanding are received, on average, three months after the invoice date. A new marketing director has recently been appointed, and she has suggested that the company should offer a 2 per cent discount for those debts outstanding being received at the end of one month and only 20 per cent being received, on average, at the end of the three months. The marketing director has also argued that a discount policy for prompt payment would prove popular with customers and would lead to a 20 per cent increase in sales. The following forecasts were made for the forthcoming year before the proposed policy was suggested: 1. A gross profit margin on sales of 40 per cent. 2. Variable overhead expenses of 30 per cent of sales. 3. Fixed expenses of RM 240,000. 4. Sales, the cost of sales and overhead expenses will accrue evenly over the year. 5. Variable and fixed overhead expenses will be paid one month after being incurred. 6. Two months credit (based on the cost of sales) will be taken from trade creditors. The Marketing Director believes these forecasts will be unaffected by any decision concerning the introduction of a discount. Company policy is to hold three months stock at all times and to have a cash balance at the yearend of RM 100,000. Ignore taxation and dividends. Required: a) Calculate the expected net profit for the forthcoming year assuming: 1. The discount policy is introduced 2. The discount policy is not introduced uir (7 marks) b) Calculate the investment in working capital at the end of the forthcoming year assuming: 1. The discount policy is introduced 2. The discount policy is not introduced (8 marks) c) Comment on your findings in (a) and (b) above and whether or not the proposed discount policy for prompt payment should be introduced. (5 marks) Juc d) Discuss the factors that influence the optimum cash level for business. (5 marks) IKEO Ltd is a manufacturer of home decoration that has been set up since 1999. IKEO Ltd achieved sales of RM5 million for the year ending 31 December 2007. Sales have not increased over the past three years, and the sales forecast prepared by the marketing department suggests that there will be no change in the forthcoming year. All sales are on credit and trade debtors are expected to pay one month after being invoiced. However, trade debts outstanding are received, on average, three months after the invoice date. A new marketing director has recently been appointed, and she has suggested that the company should offer a 2 per cent discount for those debts outstanding being received at the end of one month and only 20 per cent being received, on average, at the end of the three months. The marketing director has also argued that a discount policy for prompt payment would prove popular with customers and would lead to a 20 per cent increase in sales. The following forecasts were made for the forthcoming year before the proposed policy was suggested: 1. A gross profit margin on sales of 40 per cent. 2. Variable overhead expenses of 30 per cent of sales. 3. Fixed expenses of RM 240,000. 4. Sales, the cost of sales and overhead expenses will accrue evenly over the year. 5. Variable and fixed overhead expenses will be paid one month after being incurred. 6. Two months credit (based on the cost of sales) will be taken from trade creditors. The Marketing Director believes these forecasts will be unaffected by any decision concerning the introduction of a discount. Company policy is to hold three months stock at all times and to have a cash balance at the yearend of RM 100,000. Ignore taxation and dividends. Required: a) Calculate the expected net profit for the forthcoming year assuming: 1. The discount policy is introduced 2. The discount policy is not introduced uir (7 marks) b) Calculate the investment in working capital at the end of the forthcoming year assuming: 1. The discount policy is introduced 2. The discount policy is not introduced (8 marks) c) Comment on your findings in (a) and (b) above and whether or not the proposed discount policy for prompt payment should be introduced. (5 marks) Juc d) Discuss the factors that influence the optimum cash level for business Step by Step Solution
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