F9 June 2011 – Question 4 (b) (ii) – ZPS CO

Dear Mr. John,

There is this question saying “(ii) Calculate if ZPS Co will benefit financially by accepting the offer of:
(1) the early settlement discount;
(2) the bulk purchase discount.”

Now regarding the early settlement discount the examiner calculates the revised level of payables as “= 900,000 x 30/365 = $73,973”. However, I don’t agree to this. “Revised” means new. And the “new payables” with the discount should be calculated on the basis that the “revised” purchases decrease from 900000 to 895,500 (900000*0.995). How can we calculate the revised payables on the old purchases. The “revised” payables should be based on the new purchases, as adjusted for the discount.

Why is the discount not taken into account by the examiner? How can we just use the old purchases, to get the new payables due to the discount, by not only taking the discount into account? Doesn’t make sense?

Also the other part (part 2) regarding the bulk purchase discount. The examiner assumes the order quantity as 10000 units (as stated in the question). However, the question has given us enough information to get the EOQ so why doesn’t he use the EOQ as a basis to compare existing inventory cost to the inventory costs due to the discount?

I used EOQ and I reached the same decision as the examiner, that the discount is acceptable, by comparing the EOQ inventory costs to the new inventory costs due to the discount. So why can’t we use EOQ? Other papers use EOQ. So why not this one?

Thanks,

Gabriel.