Question

1.1 REQUIRED Use the information provided below to calculate the cost to Umhlali Stores (as a percentage) of not accepting the discount. (Assume a 365-day year.) (5) INFORMATION Jehcon Manufacturers’ credit terms to Umhlali Stores are 60 days but the manufacturer is prepared to allow a 2.5% rebate if Umhlali Stores pays the account within 10 days.

1.2 Use the information given below to calculate the:

1.2.1 EOQ (4)

1.2.2 Reorder point (4) INFORMATION Gem Enterprises intends purchasing 7 200 units of product Nutri per month during 2021 at R30 per unit. The following additional information is available: Ordering cost Stock holding cost Lead time for delivery of an order Workdays for 2021 R30 per order 10% of the purchase price 10 days 250 days

1.3 REQUIRED Use the information provided below to calculate the cash conversion cycle. (Assume a 365-day year.) (7)

INFORMATION The following information was obtained from the records of Coastal Traders for 2019:

Credit sales for the year R1 380 000 Credit purchases for the year R990 000 Inventories on 31 December 2019 R27 000 Amount owing by debtors on 31 December 2019 R150 000 Amount owing to creditors on 31 December 2019 R42 000 Average age of inventories 15 days

Answer 1

a) 1.1)

Discount term = 2.5/10, net 60

Cost of not accepting discount= [Discount rate / (100 -Discount rate )] * (365 / Number of days beyond disc. Period)

Discount rate = 2.5%
Number of days beyond discount Period = 60 - 10 = 50days

Cost of not accepting discount= [ 2.5 / 100 -2.5 ] * [ 365 / 50 ]

= 0.02564 * 7.3

= 0.1871 or 18.71%

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b) 1.2)

1.2.1 ) EOQ =

where,

D= Annual quantity demanded

S = Cost per order

H= Holding Cost

now,

given;

D= 7200

S= 30

H= 10% of purchase price i.e. 10% of 30 = 3

now,

EOQ =

= 379.47 or 379

1.2.2) Working days= 250 days
Lead time= 10 days

Re-order point ( without safety stock ) = Lead time * Average daily usage

Average daily usage= Annual Demand / No. of working days

Average Daily usage= 7200 / 250
= 28.8 units

Re-order point = 10 * 28.8
= 288

[Note: there is no additional information given for calculating safety stock. That's why calculated reorder point without safety stock]

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c) 1.3 )

Cash conversion cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding

Days Inventory Outstanding= (Average Inventory / COGS ) * days

= ( 27 000 / 990 000 ) * 365

= 9.95 days

Days Sales Outstanding = (Average Accounts Receivable / Credit Sales) * days

= ( 150 000 / 1380 000) * 365

= 39.67 days

Days Payable Outstanding = ( Average Accounts Payable / COGS ) * days

= ( 42 000 / 990 000 ) *365

= 15.48 days

Cash Conversion Cycle = 9.95 + 39.67 + 15.48

= 65.1 days