- 30 Marks
PM – May 2023 – L2 – SA – Q1 – Working Capital Management
Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.
Question
Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt. It produces a tracking device that is attached to motor vehicles. The device is designed to help locate the whereabouts of stolen motor vehicles within the country. The company’s capital (or cash operating cycle) is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.
The table below gives information extracted from the annual accounts of Vestapricy and Company Limited for the past three years.
Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Inventory: | |||
| Raw materials | 108,000 | 145,800 | 180,000 |
| Work in progress | 75,600 | 97,200 | 93,360 |
| Finished goods | 86,400 | 129,600 | 142,875 |
| Purchases | 518,400 | 702,000 | 720,000 |
| Sales | 864,000 | 1,080,000 | 1,188,000 |
| Trade receivables | 172,800 | 259,200 | 297,000 |
| Trade payables | 86,400 | 105,300 | 126,000 |
Other information is as follows:
- All purchases and sales are on credit.
- Direct wages:
- 2021: ₦300,000
- 2022: ₦250,000
- Production expenses:
- 2021: ₦72,600
- 2022: ₦171,995
- The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.
Required:
a.
i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce the length of the working capital cycle. (5 Marks)
b. In 2023, the company (Vestapricy) decided to open a new small apple shop in Owerri to be managed by a shopkeeper. The shopkeeper is deciding on the number of boxes of special apples it hopes to buy each day. A box of apples earns a contribution of ₦400 and costs ₦250.
Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.
The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.
Required:
i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:
- The Maximax decision rule.
- The Maximum decision rule.
- The Minimax regret decision rule.
Give reasons for your decisions. (8 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Decision Rules, Maximax, Minimax, Pay-off Table, Working Capital, Working Capital Cycle
- Level: Level 2
- Topic: Working Capital Management
- Series: MAY 2023