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 R280 per unit. The product is priced at cost plus 40%. The holding cost is 10% of the unit cost. The cost of placing an order for the product is R18 The annual sales are 50 000 units of which 80% is on credit. The credit terms are 3/10 net 60 days but it takes approximately 73 days to collect the debts from the credit customers. The discount applies to 40% of the credit sales. Bad debts usually account for 6% of the credit sales. In view of the above, the financial manager proposed the following to improve the profitability and liquidity PROPOSAL 1 The company should take advantage of the quantity discount offered by another supplier who offers a discount of 5% for an order size of between 2 000 and 2 999 units and a c ount of 6% for an order size of 3 000 units or more. PROPOSAL 2 The credit terms should be changed to 4.5/10 net 60 days. This is expected to increase credit sales to 55 000 units, reduce the debtors collection period to 36.50 days, lower bad debts to 4% of credit sales and increase the percentage of the credit sales to which the discount applies to 70%. REQUIRED 1. Which working capital policy is Tesa Ltd following? Provide THREE (3) reasons for your answer. 2. Calculate the EOQ if discounts are not available. (4 marks) (3 marks) 3. If Proposal 1 is implemented without considering Proposal 2, what purchase quantity would you recommend? Motivate your answer with the relevant calculations. (11 marks) Would you recommend Proposal 2, if the required rate of return on equal-risk investments is 18%? Motivate your answer with the relevant calculations. Ignore the carrying and ordering costs. (12 marks)