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Hi John,
Just wondering why in the calculation for the benefit of bulk discount in question B, there is not any finance cost relating to the overdraft? I think that if we buy more, meaning that we will use more money hence the finance cost will be incurred.
Thanks,You will have to tell me either the exam that this question appeared in, or the number of the question in the BPP Revision Kit.
I am afraid that I cannot remember the name of every exam question there has ever been (even though I do have all of them 🙂 )
Sorry, my bad. Here is the question:
KXP Coisane-business which trades solely over the internet. In the last year, the company had
sales of$ 15m. All sales were in 30days’ credit to commercial customers.
Extracts from the company’s most recent statement financial position relating to working
capital are as follows:
$’000
Trade receivables :2,466
Trade payables :220
Overdraft : 3,000
In order to encourage customers to pay on time, KXP Coproposes introducing an early settlement discount of 1% for payment within 30days, while increasing its normal credit period to 45 days. It is expected that, on average, 50% of customers will take the discount and pay within 30 days, 30%f pay after 45days, 20% of customers will not change their current paying behaviour.
KXP Co currently orders 15,000 units per month of Product Z, demand for which is constant.
There is only one supplier of product Z and the cost of product Z purchases over the last year was $540,000. The supplier has offered a 2% discount for orders of Product Z of 30,000 units or more.
Each order costs KXP Co $150 to place and the holding cost is 0.24 cents per year.KXP Co
as overdraft facility charging interest of 6%
Required
(b) Calculate whether the bulk purchase discount offered by the supplier is financially
acceptable and comment on assumptions made by your calculationYes, and what you could have done is (as I explain in my free lectures) taken the holding cost per unit as being the $0.24 given in the question plus 6% of the purchase price per unit. Currently the purchase price per unit is $540,000 / (12 x 15,000) = $3, and so you could take the current holding cost as being 0.24 + (6% x 3) = $0.42 per unit per year. This would change slightly in the situation where they ordered 30,000.
Obviously using $0.42 would result in a different answer, but you would still have got full marks.
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