Lee Company produces and sells running shoes. Sales volumes have remained stable in recent years. Financial data relating to the running shoes are as follows: $ $ Selling price 45 Variable cost (35) Fixed cost apportionment (5) (40) Profit 5 Lee Company has recently been approached by a wholesale business that wishes to buy 40,000 pairs each year but has demanded a three-month credit period. Lee Company is concerned that if the demand is accepted, its other customers, who are allowed only a one-month credit, will make similar demands. The current level of sales is 150,000 pairs each year. If the wholesaler order is accepted, 15,000 extra pairs will have to be held in inventories (where inventories are valued at total cost) and trade payables will increase by $ 650,000. The business expects a return of 35 per cent on it net investment. Required: Assess the acceptability of the offer made by the wholesaler to Lee Company on the basis that: All customers will receive a credit period of three months. Only the wholesale business will receive a three-month credit period.
Lee Company produces and sells running shoes. Sales volumes have remained stable in recent years. Financial data relating to the running shoes are as follows:
$ $
Selling price 45
Variable cost (35)
Fixed cost apportionment (5) (40)
Profit 5
Lee Company has recently been approached by a wholesale business that wishes to buy 40,000 pairs each year but has demanded a three-month credit period. Lee Company is concerned that if the demand is accepted, its other customers, who are allowed only a one-month credit, will make similar demands. The current level of sales is 150,000 pairs each year. If the wholesaler order is accepted, 15,000 extra pairs will have to be held in inventories (where inventories are valued at total cost) and trade payables will increase by $ 650,000. The business expects a return of 35 per cent on it net investment.
Required:
Assess the acceptability of the offer made by the wholesaler to Lee Company on the basis that:
All customers will receive a credit period of three months.
Only the wholesale business will receive a three-month credit period.
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