Question

Lipto Biomedic has credit sales of $740,000 yearly with credit terms of net 60 days, with an average collection period of 75 days. Lipto is considering offering a 3 percent discount for payment in 10 days. They would use the cash generated from the reduced receivables to reduce their bank loans which cost 8%. Assume ALL of the customers take advantage of the 3/10 terms. Use the following table to calculate the costs and benefits for Lipto and make decision at the bottom.

Cost(s)

Benefit(s)

B) As mentioned above, Ipto Biomedic can borrow from its bank at 8% to take a cash discount offered by one of its suppliers. The terms of cash discount are 2/155 net 90. Should the Lipto borrow the funds? Why? Why not? Show all your work...

C) Lipto Biomedic sells its product for $32 each. The carrying costs of the inventory are $1.50 per unit and its costs Lipto $30 per order in purchasing agent time. If the raw materials can only be ordered by the "gross" (1 gross = 12 dozen = 144 items) What is the economic order quantity?

Answer 1

Part A

Considering there is 360 days in a year. Total days for collection is 75 Days i.e. debtors turnover is 4.8 times (360/75). Thus loan amount for the company is $154167 ($740000/4.8), on which company is paying an interest of 154167*8%= $12333.

If company will provide discount of 3% i.e. 740000*3%= Then that will result is $ 22200. Thus it is not beneficial for the company to provide discount.

Part B

Assuming company purchases $1,000,000 per annum. Further, assuming if company pays in 90 days, then there will be no interest cost. If company pays 75 days earlier, Total payable in 90 days is $250,000 (1000000/4). Total interest outflow will be $ 4167.

Total Cash discount is $250,000*2%= $ 5,000. Thus there is a benefit for the company in using cash discount.

Part C

Total sales = 740000

Sale price is $ 32

Thus total unit sold is 23125 Unit

EOQ = Under root of 2*A*O whole divided by Ci

A= Annual Demand

O= Oedering cost per order

Ci= Carrying cost

Thus EOQ= Root of 2*23125*30/1.5= 962 unit i.e. 962/144= 6.68 gross.