Chapter 13 • Management of working capital
(All the problems below are basic-level problems.)13.1*Dixon plc uses a component, which it buys in from a supplier, in its manufacturing
process. The estimated annual usage is 23,000 units, and these are used fairly
steadily throughout the year. It is estimated that the various inventories holding costs
amount to £1.50 per unit per year. Investigation indicates that it costs about £50 to
process each order for the component. Experience shows that delivery always occurs
within one week of placing an order.
(a) What is the economic order quantity for the component?
(b) At what inventories level should the order be placed to be confident that delivery
would occur before the existing inventories of the components is all used?13.2 Pithead Products Ltd plans to sell its single product for £35 a unit.
Credit plans for the next six months are as follows:
l 70 per cent of sales are made on credit and 30 per cent for cash.
Of the credit sales revenue:
l 40 per cent will be paid during the month of sale (with the customers claiming a
cash discount of 2 per cent of the amount owed);
l 40 per cent will be paid during the month following the month of sale;
l 18 per cent will be paid during the second month after the sale; and
l the remaining 2 per cent will prove to be bad debts and are expected never to be
paid.
Sales volumes for the next few months are budgeted as follows:
Units
July 5,100
August 5,500
September 5,200
October 5,000
November 4,800
December 4,700How much cash will be budgeted to be received from sales during October?13.3*Arcadia Ltd has only one product, a garden gnome, for which it plans to increase pro-
duction and sales during the first half of next year. The plans for the next eight months
are as follows:PROBLEMS
Sample answers to
problems marked with
an asterisk appear in
Appendix 4.