Question 1 (25 marks) Sea Water Ltd is wholesale supplier of seafoods based in Swakopmund. Recently the company has experienced a continuous decine in profitability. A new management team has been employed in an attempt to reverse the situation. One of the issues to be addressed is whether or not the company's credit policy should be changed. At present the company's credit terms 1/15, net 45. All sales at present and in future will be on credit and at present 20% of the customers take advantages of the discounts. A major factor affecting profitability appears to be the fact that the company's bad debt losses amounts to 10% of sales for which discounts are not taken. In order to rectify this situation, management is considering the more effective use of discounts to encourage early payment. The new credit term will be 2/10, net 30. It is expected that this policy will result bad debts amounting to 2% of credit sales. Furthermore, only 35% of the customers are not likely to use the new discount facilities. Management expects that the new credit policy is likely to increase annual sales slightly from N$17 million to N$19 milion. It is estimated that the gross profit margin will remain unchanged at 20% and that opportunity cost is 10% The increase in sales is also expected to impact on the level of inventory carried by Sea Water Ltd. The company uses EOQ model to determine its average inventory level. Unit sales of seafoods is expected to increase from 16 000 to 18 000. The carrying cost per unit is N$5 and the ordering cost is N$200 for each order. Sea Water Ltd does not carry safety inventory Required: Calculate whether the new credit policy should be implemented or not, using 360 days as the number of days in the year. Sow all your workings (25 marks) Question 2 (25 marks) Pena Ltd is a business in a construction industry. It buys materials from a supplier at a price of N$ 250 per unit of materials ordered. The annual demand is 10 000 units. Pena's inventory cost is 25% of average inventory per year. Pena incurs N52 000 each time an order is placed with the supplier Required: a) Estimate (using a table format) the annual carrying costs, ordering costs, average inventory costs and total inventory costs associated with placing one order, five orders, 10 orders, 15 orders and 20 orders annually. Also indicate the order size in units for each number of orders. (15 marks) b) Plot a graph of costs in NS (y-axis) versus the size of order in units (x-axis) and plot the appropriate information from (a) above. Estimate the Economic Order Quantity (EOQ) from your graph. (7 marks) c) Use the EOQ to calculate the economic order quantity for Pena Ltd
