Jason Co is an online computer trader which made annual sales of $15,000,000 last year. The most recent financial statement indicates the company owns $2,466,000 trade receivables, $2,220,000 trade payables and $3,000,000 of overdraft. The customers pay within 60 days on average.

In order to boost sales, Jason Co proposes to increase the credit period to 45 days. But for payment within 30 days, the customer will receive an early settlement discount of 1%. The finance department suggests that, under the new policy, only 20% of customers will carry on paying in 60 days, 30% of customers will pay after 45 days, and 50% of consumers will take the early discount and pay in 30 days. The finance provider charges Jason Co 6% annually for overdraft facility and the new policy is also expected to reduce the cost of finance when the interest rate remains constant.

In terms of inventories, Jason Co places an order of 15,000 units with its supplier every month, which costs $150 per order. Last year, the annual cost of materials was $540,000 and the holding cost is $1.2 per unit per year. The supplier could now offer a 2% bulk discount for orders over 45,000 units and the finance department of Jason Co is required to investigate the proposal.

Required:

[i] Should Jason adopt the new credit period and early settlement policy? Calculate the net benefit and comment on your findings. Hint: provide your recommendation and evaluate its validity. [20 marks]

[ii] Should Jason accept the bulk purchase discount offered by the supplier? Calculate the different costs of inventory (including cost of material, annual ordering cost and annual holding cost before and after taking the discount) and comment on your findings.

Hint: provide your recommendation and evaluate its validity. [15 marks]

[iii] Your friend is an accountant. He mentioned that your recommendation in [ii] may change if Jolene could control the holding cost.

Explain the effect of the reduced holding cost on your recommendation and support it with calculations. [15 marks]