Simulated assessment centre un-seen material (includes pre-seen) Pre-seen element Meller Ltd (Meller) is a UK company that manufactures cutlery for restaurants, it is the largest supplier for one of the UK's most popular restaurant chains. It has a year-end of 31st March. Its liquidity ratios have been calculated for the previous two years:- Current Ratio Quick Ratio Inventory Days Receivables Days Payables Days Gross Profit Margin Operating Profit Margin 2021 2.2: 1 1.2: 1 68 66 77 23% 10% 2020 1.7: 1 1.3: 1 62 62 71 20% 9% Industry Average 2.0: 1 1.3: 1 65 63 68 20% 11% Meller has forecast the following for the year ended 31st March 2022: Credit management Sales to increase to 5 million for the year to come. Receivables forecast to be 1,250,000. The cost of financing receivables is covered by an overdraft at the interest rate of 4% p.a. Meller is now considering offering a cash discount of 0.6% for payment of debts within 22 days. It is expected that 30% of customers will take up the discount. Inventory management Meller is also trying to find the optimum order quantity for its inventory which costs 2.50 per unit to purchase. Monthly demand for its inventory is 70,000 units per month. The cost per order is currently 1.50. The holding cost of one unit p.a. is 1.20. Meller's suppliers have offered a discount of 0.55% per unit for orders of 2,500 units or more. Cash management Meller has a constant annual demand for cash totalling 7,000,000. It can replenish its current account by selling a constant amount of gilts which are held as an investment earning 4% p.a. The cost per sale of gilts is a fixed 10 per sale. The management of Meller have also considered using the Miller-Orr model of cash management. They would set a lower limit of 2,000,000, the standard deviation of the daily cash flows is 50,000 and it will cost 20 per transaction to transfer money to or from the bank. The interest rate is 4% p.a. Unseen material It is now April 2022 and the financial results for March 31st 2022 have been published. Current Ratio Quick Ratio Inventory Days Receivables Days Payables Days Gross Profit Margin Operating Profit Margin 2022 2.4: 1 1.3:1 81 87 90 24% 10% 2021 2.2: 1 1.2: 1 68 66 77 23% 10% Industry Average 2.1: 1 1.2: 1 64 62 69 20% 12% Meller has forecast the following for year ended, 31st of March 2023: Credit management Sales are forecast to be 5.5m for the year ahead. Receivables forecast to be 1,500,000. The cost of financing receivables remains the same. Inventory management Monthly demand for its inventory remains the same but the purchase cost has increased to 2.80 per unit. The cost per order has increased to 1.65. The storage cost of one unit p.a. is 0.70. Cash management All details remain the same, except the annual demand for cash is now 8,000,000. Section B - Evaluation a) Using the working capital ratios for 2021 and 2022 evaluate the liquidity position of Meller. (400 words) (25 marks) b) Explain how the one-bin and two-bin systems of inventory management work and what the advantages and disadvantages of each system are. Discuss the suitability of each system for Meller. (200 words) (10 marks) c) Explain the ABC approach to inventory management and critically evaluate how it might be applied by Meller (300 words). (15 marks) Simulated assessment centre un-seen material (includes pre-seen) Pre-seen element Meller Ltd (Meller) is a UK company that manufactures cutlery for restaurants, it is the largest supplier for one of the UK's most popular restaurant chains. It has a year-end of 31st March. Its liquidity ratios have been calculated for the previous two years:- Current Ratio Quick Ratio Inventory Days Receivables Days Payables Days Gross Profit Margin Operating Profit Margin 2021 2.2: 1 1.2: 1 68 66 77 23% 10% 2020 1.7: 1 1.3: 1 62 62 71 20% 9% Industry Average 2.0: 1 1.3: 1 65 63 68 20% 11% Meller has forecast the following for the year ended 31st March 2022: Credit management Sales to increase to 5 million for the year to come. Receivables forecast to be 1,250,000. The cost of financing receivables is covered by an overdraft at the interest rate of 4% p.a. Meller is now considering offering a cash discount of 0.6% for payment of debts within 22 days. It is expected that 30% of customers will take up the discount. Inventory management Meller is also trying to find the optimum order quantity for its inventory which costs 2.50 per unit to purchase. Monthly demand for its inventory is 70,000 units per month. The cost per order is currently 1.50. The holding cost of one unit p.a. is 1.20. Meller's suppliers have offered a discount of 0.55% per unit for orders of 2,500 units or more. Cash management Meller has a constant annual demand for cash totalling 7,000,000. It can replenish its current account by selling a constant amount of gilts which are held as an investment earning 4% p.a. The cost per sale of gilts is a fixed 10 per sale. The management of Meller have also considered using the Miller-Orr model of cash management. They would set a lower limit of 2,000,000, the standard deviation of the daily cash flows is 50,000 and it will cost 20 per transaction to transfer money to or from the bank. The interest rate is 4% p.a. Unseen material It is now April 2022 and the financial results for March 31st 2022 have been published. Current Ratio Quick Ratio Inventory Days Receivables Days Payables Days Gross Profit Margin Operating Profit Margin 2022 2.4: 1 1.3:1 81 87 90 24% 10% 2021 2.2: 1 1.2: 1 68 66 77 23% 10% Industry Average 2.1: 1 1.2: 1 64 62 69 20% 12% Meller has forecast the following for year ended, 31st of March 2023: Credit management Sales are forecast to be 5.5m for the year ahead. Receivables forecast to be 1,500,000. The cost of financing receivables remains the same. Inventory management Monthly demand for its inventory remains the same but the purchase cost has increased to 2.80 per unit. The cost per order has increased to 1.65. The storage cost of one unit p.a. is 0.70. Cash management All details remain the same, except the annual demand for cash is now 8,000,000. Section B - Evaluation a) Using the working capital ratios for 2021 and 2022 evaluate the liquidity position of Meller. (400 words) (25 marks) b) Explain how the one-bin and two-bin systems of inventory management work and what the advantages and disadvantages of each system are. Discuss the suitability of each system for Meller. (200 words) (10 marks) c) Explain the ABC approach to inventory management and critically evaluate how it might be applied by Meller (300 words). (15 marks)