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Q:An international Sports company has stable sales over the years, one of its products are cricket balls with below financial information;
Variable cost 30 GBP
Fixed cost apportionment 5 GBP 35 GBP
Net profit 5 GBP
An association has request of buying 30,000 balls per year, but demanding 4 months credit. Now, if Sports company allow this credit, other customers will demand similar credit, where they are only given one month credit. Current level of sales is 120,000 balls each year. By accepting this order, 10,000 extra balls will have to be held in stock (stock is valued at total cost) but trade creditors will increase by GBP 350,000. Sport company expect return of 25 per cent pa on it net capital invested.
Question. I want to asses the offer made on the basis that;
a, all customers will receive a credit period of four months; and
b, only the offering association will receive a four-month credit period.