Exercises

EOQ with bulk purchase discount 2

Currently the company has an annual demand of 10,000 units of inventory. Average cost per order is $7 and supplier takes from 5 to 21 days to deliver after receiving order.
 
Normal purchase price of the product is $40, however; for an order of 1,500 units supplier gives a discount of 5%.
 
Annual cost of holding one unit in stock =$2.
 

Evaluate whether entity should buy EOQ or 1,500 units of goods per order?

EOQ with bulk purchase discount 1

Currently the company purchases 2000 units per order to fulfill its annual demand of 20,000 units of inventory. Average cost per order is $6 and supplier takes from 8 to 20 days to deliver after receiving order.
 
Normal purchase price of the product is $30, however; for an order of 2,000 units supplier gives a discount of 1%.
 
Annual cost of holding one unit in stock =$10.
 

Evaluate whether the company should order at EOQ level.

Boo & Goose (CIS)

Boo acquired 80% of Goose's equity shares for $300,000 on 1 January 20X8. At the date of acquisition Goose had retained earnings of $190,000. On 31 December 20X8 Boo dispatched sold goods which cost $80,000 to Goose, at an invoiced value of $100,000.  The two companies' draft financial statements as at 31 December 20X8 are shown below.  

STATEMENTS OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME 
FOR THE YEAR ENDED 31 DECEMBER 20X8

Ragha

Ragha Co makes annual credit sales of $1,500,000. Credit terms are 30 days, but its debt administration has been poor and the average collection period has been 45 days with 1.5% of sales resulting in bad debts which are written off.
 
 
A factor would take on the task of debt administration and credit checking, at an annual fee of 2.5% of credit sales. Ragha would save $30,000 a year in administration costs. The payment period would be 30 days.
Factor will also reduce bad debt to 0.5% of the credit sales.

Grabbit Quick Co

Grabbit Quick Co achieves current annual sales of $1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and the annual profit is as follows.

 

  $000
Sales 1,800
Less COGS (1,440)
Gross profit $360
Less bad debts ($18)
Profit $342

 

Rubic

Rubic with export sales of $480m pa has an average collection period of 3 months, bad debts are 2% on sales. 

 

A factoring company will provide non-recourse factoring for a fee of 5% of revenue. As a result of this, administration savings will be made of £8m p.a. and the credit period will fall to 2 months.

 

Rubic has a cost of capital of 10%, and the exchange rate is currently 2 $/£.

Pips

Pips Limited is considering offering a cash settlement discount to its customers.

Currently its annual credit sales are $10m and its normal payment terms are 90 days.

Customers will be able to take a 2% discount for payments after 10 days.

Pips anticipates that sales will increase by 10% after the discount offer and approximately 20% of customers will take the discount.

After the offer bad debt will reduce from 2.5% of sales to 1% of sales.

Pips has a CS ratio of 40%.

Currently Pips has an overdraft on which it is paying 10% interest.