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Working Capital ManagementWorking capital managementFinancing policySection B
This question is part of a case study — click to read the full scenario(Case 16)

Section B - Case 1: AquaHarvest Ltd

Scenario: AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m.

Ignoring the bulk discount for a moment, what is the Economic Order Quantity (EOQ) for the fish feed?

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ACCA · Question 19 · Working Capital Management

Section B - Case 1: AquaHarvest Ltd

Scenario: AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m.

AquaHarvest currently finances all of its permanent current assets and a portion of its non-current assets using short-term overdrafts.

Which working capital financing policy is AquaHarvest adopting?

Answer options:

A.

A conservative policy

B.

A matching (moderate) policy

C.

An aggressive policy

D.

A hedging policy

How to approach this question

Evaluate the mix of short-term vs long-term financing. Using short-term finance (which is risky) for long-term needs is aggressive.

Full Answer

C.An aggressive policy✓ Correct
Working capital financing policies dictate how assets are funded. - Aggressive: Uses short-term finance for fluctuating current assets, permanent current assets, and potentially non-current assets. High risk, high profitability. - Matching: Matches the maturity of the asset with the maturity of the finance. - Conservative: Uses long-term finance for all non-current and permanent current assets, plus some fluctuating current assets. Low risk, low profitability.

Common mistakes

Confusing aggressive with conservative. Remember: short-term debt is risky, so using lots of it is aggressive.
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