Punchy Peanuts Limited (PPI) is a Scottish company that sells bags of peanuts to retailers throughout the UK and to three European countries France, Spain and Germany. PPI buys the bags of peanuts from its sole supplier Carter Inc, which is based in Georgia, USA.

PPI expects annual demand for its bags of peanuts to be 3,000,000 units. A bag of peanuts has a selling price of 10 and is purchased for 5 from Carter Inc. PPI places an order for 100,000 bags of peanuts at regular intervals throughout the year. As the demand for bags of peanuts at present is uncertain, PPI maintains a buffer inventory of bags of peanuts, sufficient to meet demand for 30 days.

The cost of placing an order is 75, and the storage cost for bags of peanuts is 0.50 per unit per year.

PPI normally pays Carter Inc after 60 days, but Carter Inc has offered a discount for cash settlement within 20 days.

PPI faces no currency risks at present as Carter Inc invoices PPI in sterling and gets payment from PPI in sterling and PPI invoices all its customers (UK and European) in sterling and receives payment from them in sterling.

Required:

1. What is the annual cost of the current ordering policy, excluding the purchase

price of 5 and ignoring any financing costs? Show all workings.

2. What is the annual saving if the economic order quantity model is used to determine an optimal ordering policy, excluding the purchase price of 5 and

ignoring any financing costs? Show all workings.

3. What would be the reduction in payables if PPI takes advantage of the discount

offered by Carter Inc? Show all workings.

4. If Carter Inc decided to invoice PPI in US dollars and demanded payment in US dollars and not sterling as currently, explain the specific currency risk that PPI would be exposed to.

Note: The US dollar price would be US$6.20 the equivalent number of US dollars that equals the current UK sterling cost price of 5 at the current exchange rate of 1 = US$1.20.

5. If PPIs three European customers demanded that PPI invoice them in euros and they paid PPI in euros and not sterling as currently, explain the specific currency risk that PPI would be exposed to.

Note: The euro price would be 11 the equivalent number of euros that equals the current UK sterling selling price of 10 at the current exchange rate of 1 =

1.10.