Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B
    .

FLG Co (June 08 – Modified)

FLG Co has annual credit sales of $4.2 million and cost of sales of $1.89 million. Current assets consist of inventory and accounts receivable. Current liabilities consist of accounts payable and an overdraft with an average interest rate of 7% per year. The company gives two months’ credit to its customers and is allowed, on average, one month’s credit by trade suppliers. It has an operating cycle of three months.

Other relevant information:

Current ratio of FLG Co                                   1.4

Cost of long-term finance of FLG Co               11%

Required:

A. Discuss the key factors which determine the level of investment in current assets.
B. Briefly discuss the ways in which factoring can assist in the management of accounts receivable.
C. Calculate the size of the overdraft of FLG Co, the net working capital of the company and the total cost of financing its current assets.

D.

FLG Co wishes to minimise its inventory costs. Annual demand for a raw material costing $12 per unit is 60,000 units per year. Inventory management costs for this raw material are as follows:

Ordering cost: $6 per order

Holding cost: $0.5 per unit per year

The supplier of this raw material has offered a bulk purchase discount of 1% for orders of 10,000 units or more. If bulk purchase orders are made regularly, it is expected that annual holding cost for this raw material will increase to $2 per unit per year.

Required:

(i) Calculate the total cost of inventory for the raw material when using the economic order quantity.

(ii) Determine whether accepting the discount offered by the supplier will minimise the total cost of inventory for the raw material. 

Leave a Reply

Your email address will not be published. Required fields are marked *