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Tesa Limited has a relatively high level of current assets and this is evident in the amount of inventory it carries and the amount owed
Tesa Limited has a relatively high level of current assets and this is evident in the amount of inventory it carries and the amount owed by trade debtors. A higher inventory level is maintained to absorb any sudden increases in product sales and any abnormal delays in procurement times. This achieves a higher level of customer satisfaction and leads to the smooth operations of the company. Higher levels of accounts receivables are due to the generous credit terms granted to debtors. This, in turn, attracts more customers leading to higher sales. The higher levels of inventory and accounts receivable have a direct impact on both liquidity and profitability.
An analysis of the current situation reveals the following:
The selling price of the only product that it sells is R per unit. The product is priced at cost plus The holding cost is of the unit cost. The cost of placing an order for the product is R The annual sales are units, of which is on credit. The credit terms are net days but it takes approximately days to collect the debts from the credit customers. The discount applies to of the credit sales. Bad debts usually account for of the credit sales.
In view of the above, the financial manager proposed the following to improve the profitability and liquidity:
PROPOSAL
The company should take advantage of the quantity discount offered by another supplier who offers a discount of for an order size of between and units and a discount of for an order size of units or more.
PROPOSAL
The credit terms should be changed to net days. This is expected to increase credit sales to units, reduce the debtors collection period to days, lower bad debts to of credit sales and increase the percentage of the credit sales to which the discount applies to
If Proposal is implemented without considering Proposal what purchase quantity would you recommend? Motivate your answer with the relevant calculations. marks
Would you recommend Proposal if the required rate of return on equalrisk investments is
Motivate your answer with the relevant calculations. Ignore the carrying and ordering costs. marks
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