Working Capital Management

Question 1

Assumptions related to the Economic Order Quantity formula?

Answer 1

1. Demand and lead time a known.
2. Demand and lead time are constant.
3. Purchase price is constant.
4. No buffer inventory is held.

Question 2

Economic Order Quantity formula?

Answer 2

Co = Cost of order
D = Annual demand
Ch = Cost of holding one unit for one year
Q = Quantity ordered

squared (2CoD/Ch)

Question 3

Periodic review systems?

Answer 3

1. Inventory levels reviewed at fixed intervals.
2. Inventory is then made up to a predetermined level.
3. The level is set based on demand and demand in the lead time.
4. Popular with suppliers.
5. Easier to plan administration and spreads work evenly.

Question 4

Just In Time systems benefits?

Answer 4

1. Reduced inventory levels
2. Less waste
3. Reduced production times
4. Improved quality of output

Question 5

Effective annual cost calculation?

Answer 5

1.Effective annual cost = (1 + (discount/amount left to pay))(12/no of months saved) – 1
2. 2 month to 1 month (1 month saved) = (1 + 1.5/98.5)12/1 – 1 = 0.1989 or 19.89%
3. 3 month to 1 month (2 months saved) = (1 + 1.5/98.5)12/2 – 1 = 0.0949 or 9.49%

Question 6

Indicators of overtrading?

Answer 6

1. Rapidly increase in turnover
2. Increase in inventory holding period and receivables collection period.
3. Increased reliance on short term finance, such as trade payables or overdrafts.
4. Increase in trade payables payment period.
5. Decrease in current and quick ratio.

Question 7

Which of the following is an advantage of implementing just-in-time inventory management?

Answer 7

The amount of obsolete inventory will be minimised

Question 8

If Wasp Co introduces the proposed discount, what will be the NET saving?

Answer 8

Reduction in receivables = $2.75m × 45/360 × 0.20 = $68,750

Interest saved = $68,750 × 10% = $6,875

Cost of discount = $2.75m × 0.20 × 0.01 = $5,500
Net saving = $6,875 – $5,500 = $1,375

Question 9

Managing cash resources

Answer 9

Inventory approach to cash management (Baumol model).

Miller‐Orr model

cash forecasts and cash budgets

Probability approaches

Question 10

Could improve the management of its trade receivables.

Answer 10

• Credit analysis
• Credit control
• Collections of amounts owed
• Factoring of trade receivables

Question 11

Aggressive approach?

Answer 11

An aggressive approach is where the business uses as much short‐term finance as possible for the financing, because it is cheaper.

Question 12

Conservative approach?

Answer 12

Conservative approach would finance the assets more with long‐term financing

Question 13

Matching approach?

Answer 13

Matching or balanced approach would match long‐term assets with long‐term
financing and short‐term with short‐term,