Theme: WORKING CAPITAL MANAGEMENT Vale Co sells both Product A and Product B, with sales of both products occurring evenly throughout the year.

Product A.

The annual demand for Product A is 300,000 units and an order for new inventory is placed each month. Each order costs $ 267 to place. The cost of holding Product A in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one months sales is maintained.

Product B.

The annual demand for Product B is 456,000 units per year and Vale Co buys in this product at $1 per unit on 60 days credit. The supplier has offered an early settlement discount of 1% for the settlement of invoices within 30 days.

Other important information.

Vale Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year. (! After reading this case is strongly recommended to review your knowledge of working capital management, inventory calculations!)

You are required:

1. Calculate the following values for Product A:

1.1.The total cost of the current ordering policy.

1.2.The total cost of an ordering policy using the economic order quantity.

1.3.The net cost or saving of introducing an ordering policy using the economic order quantity.

2. Calculate the net value in dollars to vale Co of accepting the early settlement discount for Product B!

Comments for 1.1.

- Ordering cost?

- Order per month?

- Buffer inventory

- Average inventory excluding buffer inventory?

- Average inventory including buffer inventory?

- Holding cost?

Comments for 1.2.

- economic order quantity?

- Number of orders p.a.?

- Order cost?

- Average inventory excluding buffer inventory?

- Average inventory including buffer inventory?

- Holding cost?

Comments for 2.

- How much are Product B trade payables at the end of the year?

- How much are Product B trade payables at the end of the year after the discount?

- Change in payables?

- Change in financing cost?

- Value of discount?

Thank you very much please help!