Your superior, the general manager of Plastic Plus Manufacturers Ltd. has recent
ID: 2489205 • Letter: Y
Question
Your superior, the general manager of Plastic Plus Manufacturers Ltd. has recently been talking to the chief buyer of Fun Toys Ltd, which makes a wide range of toys for young children. Fun Toys is considering changing its supplier of plastic granules and has offered to buy its entire requirement of 2,000 kilograms per month from you at the going market rate, provided you will grant it three months' credit on its purchases. The following information is available i) Plastic granules sell for $10 per kilogram, variable costs are $7 per kilogram and fixed costs are $2 per kilogram ii) Your own company is financially strong and has sales of $15 million per year For the foreseeable future, it will have surplus capacity and it is actively looking for new outlets iii) Extract from Fun Toys' statement: (a) Suggest sources of information you would use to assess the creditworthiness of potential customers who are unknown to you. Critically evaluate each source of information. (b) Describe the accounting controls you would use to monitor the level of your company's trade debtors. (c) Advise your general manager on the acceptability of Fun Toys' proposal, giving your reasons and making any calculations you consider necessary.Explanation / Answer
a) we can get the credit worthiness of potemtial customers form sources like experian,equifax,transunion etc. By lookin at the data where they gove credit score we can estimate the credit worthiness
b)I will divide the trade debtors into different buckets like (0 to 0.5mn), (0.5 to 1mn),(1-3 mn),(3-5 mn) and (>5mn). Based on the amount lying in each bucket we will take decision how to approach the customers and review our credit terms with them.We can also calculate the days passed from invoice into different buckets and review
c)If we caluclate DpO of the fun toys for pasrt three years it is
DpO=365*(acc pay/sales)
2013=365*(180/800)=82 days
2014=365*(190/980)=71 days
2015=365*(220/640)=125 days
By seeing this day we can make out they are paying the creditors more than 90 dyas which will not go good for us . But still we can go ahead as it will improve our sales growth and marginss
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