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Working Capital ManagementSection BFinancial ManagementSyllabus CInventory Management

ACCA · Question 16.5 · Working Capital Management

CASE 1: AQUAHARVEST LTD

AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year.

AquaHarvest is considering implementing a Just-In-Time (JIT) inventory system for its salmon feed. Which of the following is a critical prerequisite for JIT to be successful?

Answer options:

A.

Large warehouse capacity to store buffer inventory.

B.

Highly reliable suppliers who can deliver feed exactly when needed.

C.

Purchasing feed in massive bulk quantities to achieve economies of scale.

D.

A high tolerance for production stoppages.

How to approach this question

Recall the core philosophy of JIT: zero inventory, relying on perfect timing from the supply chain.

Full Answer

B.Highly reliable suppliers who can deliver feed exactly when needed.✓ Correct
Just-In-Time (JIT) inventory management aims to minimize inventory holding costs by receiving goods only as they are needed in the production process. Because there is no buffer stock, a critical prerequisite for JIT is having highly reliable suppliers who can guarantee exact delivery times and perfect quality. Any delay from a supplier will immediately halt production.

Common mistakes

Confusing JIT with EOQ (which balances holding and ordering costs, often leading to bulk orders).
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