SOLUTIONS TO PROBLEMS QUESTIONS IN THE FIN3702 STUDY GUIDE

Study unit 5: The Cash Conversion Cycle

Question 6

Given facts: Accounts receivable = R2 000 000

AAP = 30 days
Inventory = R5 000 000
Average daily sales = R100 000

CCC = AAI + ACP – APP

Step 1: Determine the average age of inventory (AAI)

Inventory R5 000 000

Average age of inventory = = = 50 days
Daily sales R100 000

Step 2: Determine Accounts receivable period (ACP)

Receivable s R2 000 000

Accounts receivable period = = = 20 days
Daily sales R100 000

Step 3: CCC = AAI + ACP – APP

CCC = 50 days + 20 days – 30 days = 40 days

Question 7

Please note that in the absence of the “cost of goods sold”, the sales value can be used
to approximate the levels of inventory if we assume that all “material” produced is sold
off in sales.

365 days
Average age of inventory (AAI) =
Sales/Inve ntory

Annual sales = R2 000 000 x 12 months = R24 000 000

R2 000 000
Inventory of half of monthly sales = = R1 000 000
2

365 days
Therefore AAI = = 15.2 days
R24 000 000/R1 000 000
Question 8

CCC = AAI + ACP – APP;

If, ACP = 60 days; APP = 45 days and AAI = 72 days

CCC = 72 days + 60 days – 45 days = 87 days.

Question 9

Calculate each of the respective components of the Cash Conversion Cycle.

As mentioned above, the sales value can be used to calculate the inventory movements
in the absence of the cost of goods sold figure.

Current inventory
Average age of inventory (AAI) =
Daily sales

R120 000
AAI = = 73 days
R600 000/365

Accounts receivable
Average collection period (ACP) =
Daily sales

R157 808
ACP = = 96 days
R600 000/365

Accounts payable
Average payment period (APP) =
Daily purchases

R25 000
APP = = 25 days
R365 000/365

CCC = AAI + ACP – APP

CCC = 73 days + 96 days – 25 days = 144 days.

Question 10

CCC = AAI + ACP – APP

This question requires you to determine the change in the CCC from one arrangement
to another. Please note that since the accounts payable remain unchanged, we can
ignore them as part of the calculation.

Therefore using CCCold and CCCnew and considering that CCC = AAI + ACP – X

Average inventory Average account receivable

CCCold = + +C
Daily sales Daily sales

R12 000 000 R8 000 000

CCCold = + + C = 200 days
R100 000 R100 000
1
[R12 000 000 x 0.80] * [R8 000 000 x 0.80]
CCCnew = + + C = 178 days
[R100 000 x 0.90] [R100 000 x 0.90]

*1 the 20% decline in inventory means that only 80% of the current value is applicable.
The same argument applies to the rest of the calculations above.

Change in the CCC = New CCC – Old CCC

Changes in CCC = 178 days – 200 days = 22 days shorter.

Study unit 6: Inventory Management

Question 4

Re-order point = days of lead time x daily usage

Days of lead time = 15 days + 40 days = 55 days

40 days are required to carry 250 tons of steel

250 tons
1 day = = 6.25 tons = (the daily usage)
40

Reorder point = 55 days x 6.25 = 343.75 tons ≈ 344 tons

Question 5

2xSxO 2 x R150 x (150 000 x 12)****

EOQ = = = 32 863.35 ≈ 32 863
C 0.50

****Please take note of the need to ensure that all variables are equated to annual
figures before you do the correct calculation. The value of usage (S) is quoted per
month!

Question 7

Firm’s EOQ.

2xSxO 2 x R100 x 1 440 000

EOQ = = = 26 832.22 ≈ 26 833
C 2 x 0.20

Question 8

S Q 1 440 000 R26 833

Total cost = O x +Cx = x R100 + x (0.2 x 2)
Q 2 26 833 2

= R5 366.60 + R5 366.53 = R10 733 or ≈ R10 733

Question 9

Grunwuld Electronics

2xSxO 2 x 126 000 x R200

EOQ = = = 3 174.9 ≈ 3 175
C R25 x 0.20
Question 10

The average inventory level = the average inventory (Q/2) plus the safety stock

Q 3 175  126 000 

Average inventory level = + safety stock = +  x (30)
2 2  360 

= 1 587.50 + 10 500 ≈ 12 087.50 = 12 088.

Question 11

Maximum inventory = EOQ + safety stock

Maximum inventory = 3 175 + 10 500 = 13 675

Question 12

S 126 000
Number of orders = = = 39.69 ≈ 40 orders
Q 3 175
Study unit 7: Trade receivables management

Question 4

Positive disbursement float = R15 000 x 5 = R75 000

Negative collections float = R17 000 x 3 = R51 000

Net float = R75 000 – R51 000 = R24 000

Question 5

Accounts receivable
Accounts receivable period (ACP) =
Sales/365

Therefore, accounts receivable = ACP x Sales/365

= 35 x 2 027 773/365

= R194 444
Study unit 8: Bank and Trade Credit

Question 8

Calculate the interest payable

60
[R100 000 x (0.085 + 0.02)] x = R1 750
360

120
[R100 000 x (0.09 + 0.02)] x = R3 667
360

Total interest = R3 667 + R1 750 = R5 417

Question 10

Unused portion of revolving credit loan = R200 000 – R100 000 = R100 000

Commission payable on unused portion = (R100 000 x 0.01) = R1 000

Interest payable on amount borrowed = (R100 000 x 0.075) = R7 500

Total interest payable = R7 500 + R1 000) = R8 500

R8 500
Effective annual rate = = 0.085 or 8.5%
100 000