The managers of Finozest Ltd are worried about the level of the company's interest payments. Financial information for the last 30 months is given below. Details 2 years ago 2 years ago 1 year ago 1 year ago Current year Jan to June July to Dec Jan to June July to Dec Jan to June Total sales (K'000) 3294 3267 3430 3412 3583 Credit sales as a percentage of total sales 85 90 90 95 95 Average accounts receivable (K’000) 694 842 972 1148 1334 Average inventory: Raw materials (K'000) 95 90 110 115 120 Work in progress (K’000) 210 220 200 190 220 Finished goods (K’000) 115 90 100 95 80 Percentage of credit sales represented by customers taking the early settlement discount 50 45 45 40 40 Average overdraft interest rate for Finozest (% per year) 8.5 8.5 8.0 8.0 9 Finozest Ltd offers a cash discount of 2% for payment within seven days. The normal credit period is 45 days. In Groups allocated, required: a) Finozest's manager estimates that the interest cost of financing inventory and accounts receivable has increased by more than 50% during the last 30 months. Evaluate whether you agree with this estimate, demonstrating: (i) why interest costs have increased; and (ii) any significant changes in inventory management and accounts receivable payment patterns. b) Evaluate why the percentage of credit sales represented by customers taking the early settlement discount has fallen, and recommend whether the company should continue to offer the early settlement discount for payment in seven days. c) Discuss strategies that the managers of Finozest Ltd might adopt to reduce the interest costs of accounts receivable and inventory.
The managers of Finozest Ltd are worried about the level of the company's interest payments.
Financial information for the last 30 months is given below.
Details | 2 years ago | 2 years ago | 1 year ago | 1 year ago | Current year |
Jan to June | July to Dec | Jan to June | July to Dec | Jan to June | |
Total sales (K'000) | 3294 | 3267 | 3430 | 3412 | 3583 |
Credit sales as a percentage of total sales | 85 | 90 | 90 | 95 | 95 |
Average accounts receivable (K’000) | 694 | 842 | 972 | 1148 | 1334 |
Average inventory: Raw materials (K'000) | 95 | 90 | 110 | 115 | 120 |
Work in progress (K’000) | 210 | 220 | 200 | 190 | 220 |
Finished goods (K’000) | 115 | 90 | 100 | 95 | 80 |
Percentage of credit sales represented by customers taking the early settlement discount | 50 | 45 | 45 | 40 | 40 |
Average overdraft interest rate for Finozest (% per year) | 8.5 | 8.5 | 8.0 | 8.0 | 9 |
Finozest Ltd offers a cash discount of 2% for payment within seven days. The normal credit period is 45 days.
In Groups allocated, required:
a) Finozest's manager estimates that the interest cost of financing inventory and accounts receivable has increased by more than 50% during the last 30 months. Evaluate whether you agree with this estimate, demonstrating:
(i) why interest costs have increased; and
(ii) any significant changes in inventory
patterns.
b) Evaluate why the percentage of credit sales represented by customers taking the early settlement discount has fallen, and recommend whether the company should continue to offer the early settlement discount for payment in seven days.
c) Discuss strategies that the managers of Finozest Ltd might adopt to reduce the interest costs of accounts receivable and inventory.
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