Cash operating cycle The working capital (or cash opersting) cycle of a business is the length of time ‘between the payment for purchased materials and the receipt of payment from selling the goods made with the materials. ‘The table below gives infomation extracted from the annual accounts of Entity M for the past three years. Entity M - Extraets from annual account Yeart Year2_ Year3 $s $ $ Inventory: Raw materials 108,000 145,800 180,000 Workin progress 75600 $7,200 93,360 Finished goods $6400 129/600 2875 Purchases, 518.400 702,000 720,000 (Cost of goods sold 756,000 972,000 1,088,360 Sales 864,000 1,080,000 1,186,000 Tradereceivables 172,800 "269,200 287,000 Trade payables 86400 105.300 126,000 Required (a) calculate the length of the working capital cycle (assuming 365 days in the ‘yeny);and (b) list the actions that the management of Entity M might be take to seduce the length of thecyde.Inventory management KL Games uses tooden boxes as the container for a product that it makes. Itas a requirement for 40 wooden baxes a day, for each of the 250 working days (50 weeks) in each year. The boxes are currently bought in batches of 200 from. a local supplier for $2 each. The cost of ordering the boxes from the local supplier is $65, segacdless of the size ofthe ordec. ‘The annwal inventory holding cost s 25% of the inwentory value, Requized a) Calculate the economic order quantity and the frequency of placing orders. Calculate the annual saving in costs that would be obtained by using the EOQ as the order size instead of buying in batches of 200 boxes per order. (b) Recommend whether or not it is worthwhile to make use of the local supplier's new quantity discount scheme below. Order quantity _Discoun t ‘boxes 0-989 0% 3,000— 1,989 5% 5,000 10% Trade receivables management Enlity M is reviewing its credit policy. It i estimated that if the period of credit allowed fo customer: is reduced fo 60 days, there will be 2 25% rediction in annial sales, but bad debts would be reduced by $3000) each year. It would also be necessary to spend an extra $20,000 each year on credit control. Entity M has cash flow difficulties and relies on overdraft finance, for which the interest rate is 9% Required Calculate the effect of these changes on the annual profit. Base your anziver on the level of sales in Year3, and assume that purchases and inventory would be seduced in the same proportion ae the reduction in sales Entity M- Extracts from annual accounts Year3 Inventory $ Raw materials 180,000 ‘Work in progress 93.360 Finished goods 12.875 Purchases Cost of goods sold Sales Trade receivablesDiscount and factor a) A business entity offers its customers trade credit of 90 days. Its considering ‘whether io offer a settlement disconint of 2% for payment within seven days. Requiced Calculate the cost of offering the discount, as an annual interest cost (b) Entity Chas monthly sales of $100000. A factor has offered to take over the administation of Entity C's trade receivables, on a non-recourse basis (or ‘without secourse basis). It would chaige a fee of 4% of the value of invoices ‘processed. If the factor takes over this work, Entity C would save monthly administation costs of $2,000 and would avoid its bad debts, which are 075% of sales. Entity Chas been informed by the factor that the average collection period (the time between issuing an invoice and receiving payment from the ‘oustomey| will be reduced from 2 months to 1 month. The factor will alse. provide finance by lending 80°. of the value of unpaid invoices, charging interest at sn annual sate of Son the cssh that #t ends. At the moment, Eniity C finances its trade receivables with bank overdraft finance at 9%. per year interest Required Calculate the net effect on annual profits of Entity Cif the factor took over the administration of the trade receivables and provided finance on the terms. decesibed above.