INFORMATION

MANAGING INVENTORIES AND DEBTORS

Nellie Ngubane recently became a B. Com graduate, specialising in working capital management. As a result of her excellent academic record she was recruited by a recently established private company. The company is in the retail sector and specialises in the sale of designer bathtubs. Plans are in place to establish branches at other major cities.

As an upstart company it was unable to afford to employ separate managers for each of the functional areas. So Nellie was employed as the manager who was responsible for all aspects pertaining to the inventories and debtors of the company.

When she started her job at the company, she discovered the following:

The company was seeking to expand rapidly and customer satisfaction was the priority. As a result, credit was granted to as many of the applicants as possible and adequate inventories were maintained in order to prevent stock-outs from occurring.

The average monthly demand for the bathtubs was 400. The selling price of the bathtubs was R7 500 and a mark-up of 50% on cost was used. All the sales are on credit and the credit terms are 60 days. Collection costs of approximately R50 per unit sold were incurred. The annual holding cost of a bathtub was 1% of the cost of the item. The cost of placing an order for bathtubs was R18.75. The cost of capital was 12%.

Nellie has proposed the following to the CEO: The company should take advantage of a 4% discount from the manufacturer by ordering 100 bathtubs each time instead of ordering the EOQ. A discount of 2.5% should be granted to those customers who settle their accounts within 15 days. She expects that this is likely to apply to 40% of the sales.

Question 1 Calculate the annual profit to the company, without considering Nellies proposals.

Question 2

How much will the net annual saving be if the company takes advantage of the 4% manufacturers discount, as proposed by Nellie?

Question 3 Determine the expected annual profit to the company if Nellies proposal of a 2.5% settlement discount to customers is approved. END