Velox Cycles Ltd (Velox), a bike manufacturer, provides a three-year replacement warranty on its bike saddles, which cost $50 each to make. Velox manufactures 100,000 bike saddles in a year.

Velox hires Quantum Consultants Ltd (Quantum) to estimate how many saddles may need replacing in a year. Quantum's statisticians calculate that a maximum of 15% of saddles will need to be replaced each year.

The directors of Velox wish to pay a dividend to shareholders and so request Sara Willow, the company's inhouse accountant to report on the financial condition of Velox. Sara reports that cashflow is extremely strong and easily exceeds recurring debts. She also reports that, excluding contingent liabilities, Velox's assets exceed its liabilities by $750,000.

Required:

Advise the directors of Velox whether they should authorise a dividend payment to shareholders. You should include comment on whether the directors should rely on Quantum's an Sara's advice.