QUESTION 4 Indigo Ltd is a manufacturer of electric vehicle parts. Although Indigo Ltd is making a profit, the Finance Director is concerned that the business continues to use an overdraft to fund the business on a day to day basis and may not be managing working capital effectively. The following information is available in relation to Indigo Ltd: Indigo Ltd Average trade receivables settlement period 57 days Average inventory holding period 50 days Average trade payables payment period 45 days In addition: i) Demand for electric vehicle parts has been 600,000 units for a number of months. Demand is expected to increase by 10% in February and an additional 10% in March 2020 before remaining static at March 2020 levels for the remainder of the year. Each unit sells for 4. ii) 10% of sales are on one months credit terms with the remaining 90% of sales being on two months credit terms. iii) It is company policy to make bulk purchases of raw materials to take advantage of bulk buying discounts. Each unit requires six component parts at a cost of 0.30 per part. In January 2020, purchases of parts are equal to the parts required to meet sales demand in February and March 2020. In March 2020, purchases of parts are equal to the parts required to meet sales demand in April and May 2020. Raw materials are paid on a cash basis in the month in which the purchases are made. iv) Rent of 300,000 per quarter is paid quarterly in advance. The first quarterly payment is due on 1 January 2020 v) Other expenses are 960,000 per month, increasing to 1,010,000 per month from March 2020 onwards. These costs are payable in the month in which they are incurred. REQUIRED Please note: a maximum word count applies to parts (d) and (e) of this question ONLY. There are no maximum word counts for parts (a), (b) and (c). (a) Explain what is meant by the cash operating cycle. (2 marks) (b) Calculate the cash operating cycle for Indigo Ltd and explain what this figure means. (4 marks) (C) Prepare a cash budget for the months of January, February and March. Analyse the impact on cash of Indigo Ltd's sales and purchases policies as noted in ii) and iii) above, making specific reference to your cash budget. (22 marks) (d) Please note: the maximum word count for this requirement is 385 words. Evaluate Indigo Ltd's cash position and assess the impact on Indigo Ltd of constantly needing an overdraft to finance the business. You may use the calculations from part (c) to illustrate your answer. (11 marks) (e) Please note: the maximum word count for this requirement is 385 words. Indigo Ltd's inventory management policy as noted in il) indicates that the company will hold high levels of inventory. Evaluate Indigo Ltd's inventory management policy as noted in ill) above. (11 marks) (Total marks for question 4: 50 marks) END OF PAPER QUESTION 4 Indigo Ltd is a manufacturer of electric vehicle parts. Although Indigo Ltd is making a profit, the Finance Director is concerned that the business continues to use an overdraft to fund the business on a day to day basis and may not be managing working capital effectively. The following information is available in relation to Indigo Ltd: Indigo Ltd Average trade receivables settlement period 57 days Average inventory holding period 50 days Average trade payables payment period 45 days In addition: i) Demand for electric vehicle parts has been 600,000 units for a number of months. Demand is expected to increase by 10% in February and an additional 10% in March 2020 before remaining static at March 2020 levels for the remainder of the year. Each unit sells for 4. ii) 10% of sales are on one months credit terms with the remaining 90% of sales being on two months credit terms. iii) It is company policy to make bulk purchases of raw materials to take advantage of bulk buying discounts. Each unit requires six component parts at a cost of 0.30 per part. In January 2020, purchases of parts are equal to the parts required to meet sales demand in February and March 2020. In March 2020, purchases of parts are equal to the parts required to meet sales demand in April and May 2020. Raw materials are paid on a cash basis in the month in which the purchases are made. iv) Rent of 300,000 per quarter is paid quarterly in advance. The first quarterly payment is due on 1 January 2020 v) Other expenses are 960,000 per month, increasing to 1,010,000 per month from March 2020 onwards. These costs are payable in the month in which they are incurred. REQUIRED Please note: a maximum word count applies to parts (d) and (e) of this question ONLY. There are no maximum word counts for parts (a), (b) and (c). (a) Explain what is meant by the cash operating cycle. (2 marks) (b) Calculate the cash operating cycle for Indigo Ltd and explain what this figure means. (4 marks) (C) Prepare a cash budget for the months of January, February and March. Analyse the impact on cash of Indigo Ltd's sales and purchases policies as noted in ii) and iii) above, making specific reference to your cash budget. (22 marks) (d) Please note: the maximum word count for this requirement is 385 words. Evaluate Indigo Ltd's cash position and assess the impact on Indigo Ltd of constantly needing an overdraft to finance the business. You may use the calculations from part (c) to illustrate your answer. (11 marks) (e) Please note: the maximum word count for this requirement is 385 words. Indigo Ltd's inventory management policy as noted in il) indicates that the company will hold high levels of inventory. Evaluate Indigo Ltd's inventory management policy as noted in ill) above. (11 marks) (Total marks for question 4: 50 marks) END OF PAPER
