ExpertMedium2 marksMultiple Choice
ACCA · Question 19 · Working Capital Management
Section B - Case 1: AquaHarvest
Scenario: AquaHarvest operates offshore kelp farms. The company requires 50,000 specialized biodegradable ropes per year. The cost of placing an order is $200. The holding cost per rope per year is $4.00. The standard purchase price per rope is $15.00.
The supplier has offered a 2% bulk discount on the purchase price if AquaHarvest orders in batches of 10,000 ropes.
Question: What is the total annual cost (purchase + ordering + holding) if AquaHarvest accepts the bulk discount offer?
Section B - Case 1: AquaHarvest
Scenario: AquaHarvest operates offshore kelp farms. The company requires 50,000 specialized biodegradable ropes per year. The cost of placing an order is $200. The holding cost per rope per year is $4.00. The standard purchase price per rope is $15.00.
The supplier has offered a 2% bulk discount on the purchase price if AquaHarvest orders in batches of 10,000 ropes.
Question: What is the total annual cost (purchase + ordering + holding) if AquaHarvest accepts the bulk discount offer?
Answer options:
A.
$735,000
B.
$756,000
C.
$771,000
D.
$758,944
How to approach this question
Calculate three components: 1) Annual purchase cost with the 2% discount. 2) Annual ordering cost (Demand / Order Size) * Cost per order. 3) Annual holding cost (Order Size / 2) * Holding cost per unit. Sum these three figures.
Full Answer
B.$756,000✓ Correct
To evaluate the bulk discount, calculate total costs at the new order quantity of 10,000.
1. Purchase Cost: 50,000 ropes * ($15 * 0.98) = $735,000.
2. Ordering Cost: (50,000 / 10,000 orders) * $200 = 5 orders * $200 = $1,000.
3. Holding Cost: (10,000 / 2) * $4 = 5,000 * $4 = $20,000.
Total Annual Cost = $735,000 + $1,000 + $20,000 = $756,000.
Common mistakes
Calculating holding costs on the maximum inventory (10,000) rather than average inventory (5,000).
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