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PROBLEM # 1: ( 10 + 2 + 3 = 15 Marks )
Kahani Ghar, a local company, mainly deals in the business of children storybooks. The company observes a stable demand for the storybooks so it keeps on replenishing its inventory by placing order(s) for more storybooks from the publisher whenever there is an inventory shortage. The company is planning to buy 400,000 storybooks in the coming year for which it can place a single order or multiple orders as provided in the following table. Each order would cost Rs. 100 and the annual carrying cost of the inventory would be Rs. 0.50 per storybook. Average inventory over theyear would be half of the order size so the carrying costs would be calculated accordingly.
Required:
a) Fill in the following table by keeping above information into consideration.


b) Which order should be placed by Kahani Ghar according to the table and why?
c) Calculate Economic Order Quantity. Is your answer consistent with your findings in part (b)?
PROBLEM # 2: ( 4 + 1 = 5 Marks )
ABC Inc. mainly deals in selling goods on credit and the company’s average collection period is 40 days. The company is recently considering two options regarding its terms of credit. First option includes terms of 3/10 net 40 with an estimation that 60% of the customers will pay within 10 days whereas remaining will pay after 10 days. Second option includes terms of 3/15 net 40 days with an estimation that 40% of the customers will pay within 15 days whereas remaining will pay after 15
days.
Required:
a) What will be the average collection period of ABC Inc. in both options?
b) Which option is more suitable for the company (ignoring the cost of discounts) and why?

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Replies to This Discussion

please share solution of 2nd problem.

how can we calculate average inventory in this case???  there isn't any opening and ending inventory?? please reply time is short

2.60%*10+40%10=10days

tehrim bro i m talking about first Q for filling the given table. how to calculate average inventory??? 

I think so that 200,000 as in the question 

inventory over the year would be half of the order size so this will be ending inventory and take the order size as opening inventory 
My scenario IDK if its correct or wrong

We can consider this example

ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,000,000. What is the balance in accounts receivable at year-end?

Solution

$500,000 
to answer it - take total sales divided by 365 to get avg day's sales

3,000,000 / 365 = $8219

then take avg days sales and multiply by average collection days

8219 x 60 = $493,150. Closest answer to this is C.

 

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