BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 9 Tutorial Answers
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Question 1
(a) The following information relates to product HPI168 of Relax Sdn. Bhd.:
Cost per unit RM100
Demand per year 300,000 units
Cost per order RM5,000
Holding cost as a percentage of cost per unit 5%
Recently, the quantity of each order placed by the company is 20,000 units. A newly
appointed financial manager has advised the company to order at the economic order quantity
(EOQ) to improve the efficiency of inventory management.
The supplier offers bulk order discount of 1% if the company orders at 100,000 units per
order.
Required:
(i) Calculate the total inventory costs at the economic order quantity (EOQ).
(ii) Calculate the total inventory costs if the company wants to take the bulk order
discount of 1%.
(iii) According to your answers in part (a)(i) and (a)(ii) above, explain whether Relax Sdn.
Bhd. should accept the 1% discount.
(b) Explain economic order quantity (EOQ) with a graphical presentation.
Question 2
Wallace Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay,
assuming a 360-day per year. As a result, Wallace Co has a trade receivables balance of $750,000.
The company relies on an overdraft to finance this at an annual interest rate of 10%
Wallance Co is considering offering an early settlement discount of 1% for payment in 30 days. It
expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30
days in order to obtain the discount.
If Wallace Co introduces the proposed discount, what will be the NET impact?
Question 3
A company needs $150,000 each year for regular payments. Converting the company’s short term
investments into cash to meet these regular payments incurs a fixed cost of $400 per transaction.
These short-term investments pay interest of 5% per year, while the company earns interest of only
1% per year on cash deposits.
According to the Baumol Model, what is the optimum amount of short-term investments to convert
into cash in each transaction (to the nearest $’000)?
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 9 Tutorial Answers
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Question 4
BJ Company has annual credit sales of RM1,000,000. Credit customers take 45 days to pay. Bad debts
are 2% of sales. The company finances its trade receivables with a bank overdraft, on which interest is
payable at an annual rate of 15%.
A factor has offered to take over administration of the receivables ledger and collections for a fee of
2.5% of the credit sales. This will be a non-recourse factoring service. It has also guaranteed to reduce
the payment period to 30 days. It will provide finance for 80% of the trade receivables, at an interest
cost of 8% per year. BJ Company estimates that by using the factor, it will save administration costs
of RM8,000 per year.
Required
What would be the effect on annual profits if BJ Company decides to use the factor’s services?
(Assume a 365-day year)
