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Hello Mr.John. I have a doubt with regards to two section C questions under working capital management.
1st question- Dusty co (sept. 2019)
2nd question- KXP co (decc 2012)For both the questions, we are required to calculate the financial impact of accepting the bulk purchase discount. However, for the first question, we are doing the additional work of calculating the increase in financing cost between current policy and bulk purchase policy and the increase in inventory management costs, whereas for the second question(KXP co), We just compare the total annual costs between the current policy and bulk purchase policy in order to make our decision and ignore any increase in the financing/inventory management cost during our calculation. Both the questions have given us an overdraft interest rate.
My question is, when do we know we have to calculate the increase in inventory management costs and the finance cost when calculating the financial impact of accepting a bulk purchase discount?
The first question(Dusty co), does mention an overdraft figure in the question, could it be because of that we’re required to do the extra work?
When calculating the financial impact of accepting a bulk purchase discount, the decision on whether to include the increase in inventory management costs and finance costs depends on the specific requirements of the question.
In the case of Dusty Co, where an overdraft figure is mentioned, it is likely that the increase in finance costs is considered because the overdraft will be affected by the change in inventory levels.
However, for KXP Co, is whether an offered bulk discount is financially viable, by comparing the total annual costs between the current policy and the bulk purchase policy without explicitly considering the increase in finance or inventory management costs.
It is important to carefully read the requirements of each question. If you are unsure write down any assumptions that you are making. Make it clear to the marker what you have done and why.
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