Question :
(A) The following data for the current year relate to a sterile pack purchased by the Apollo Hospital:
Annual demand 90,000 units
Annual holding cost per unit $8
Cost of placing an order $25
From the start of next year the cost of placing an order will rise by $11 but all the other data will remain the same.
The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model.
Required:
(a) Calculate the EOQ for:
(i) the current year
(ii) next year
(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the sterile packs.
(c) Identify FOUR major costs associated with each of the following:
(i) holding stock;
(ii) ordering stock.
(B) DEF Ltd is the Mauritius agent for the installation and servicing of a new type of infra -red coffee roasting machine. The company is currently selling the machine to a variety of grocers and other retail outlets and believes it could have an appeal to householders on a mail order basis. Over the first two years of operation, about 3,000 machines have been installed and although many of these have given technical trouble, it is believed that the major cause of malfunctioning have been overcome.
The gross profit margin on these machines is low. The company has kept its overhead to a minimum, but has still failed to show a net profit. It has experienced fairly heavy bad debts. The normal credit terms require payment in the month following installation of the equipment, but slow payment by a significant number of retail customers has added to the shortage of liquid funds.
In reviewing the position, the board has asked for the chief accountant's comments on four possible lines of action:
(a) To give longer credit in the hope of attracting more sales which would improve the overhead/sales ratio.
(b) To offer, say 5%, discount for payment within the existing allowed credit period.
(c) To pass the whole sales ledger and debt collection procedures to a factor in order to obtain quicker access to funds.
(d) To insure the book debts so as to minimize the impact of bad debts.
You are required to give your views on the practicability and possible benefits of these various courses of action and include any further comments or suggestions which appear to be relevant to the company's liquidity problem.