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Lumen Ltd: working capital and inventory control
FM Financial Management. 20 marks, about 36 minutes at exam pace. Section B style, 20 marks.
How to use this practice
- This is practice written for this site in the style of ACCA's constructed response questions. It is not an ACCA question and the marking points are not ACCA's marking scheme. It follows the FM syllabus on working capital management, including the cash operating cycle and the economic order quantity.
- Write your answer in the box under each requirement. Show your workings for calculations. Your text stays in this browser.
- Afterwards, open the marking points and tick each point that your answer made clearly and only once. Points marked as figures are correct amounts.
Scenario
Lumen Ltd makes and sells lamps to shops. All of its sales are on credit. The finance director is worried that the business is short of cash even though it makes a profit, and she has asked you to look at the working capital. She would like to know the length of the cash operating cycle and what could be done to shorten it.
Lumen also buys a component called the LX unit from one supplier. She wants to find out the best order size for it.
Extract from the financial statements ($)
For the year just ended.
| Item | Amount |
|---|---|
| Revenue (all on credit) | 2,920,000 |
| Cost of sales | 2,190,000 |
| Inventory at the year end | 360,000 |
| Trade receivables at the year end | 400,000 |
| Trade payables at the year end | 240,000 |
The LX unit
| Item | Detail |
|---|---|
| Annual demand | 24,000 units |
| Cost of placing an order | $40 |
| Annual holding cost per unit | $2.50 |
Calculate the inventory days, the receivable days, the payable days (using cost of sales) and the cash operating cycle. (8 marks)
Note: Use a 365 day year.
0 words
Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.
Marks counted: 0 of 8
Explain three ways in which Lumen could shorten the cash operating cycle, with the risks of each. Calculate the cash released if the receivable days fall from 50 to 40. (6 marks)
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Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.
Marks counted: 0 of 6
Calculate the economic order quantity for the LX unit, the number of orders in a year, and the total annual cost of ordering and holding at the EOQ. State two assumptions of the model. (6 marks)
0 words
Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.
Marks counted: 0 of 6
Marks counted across all requirements: 0 of 20. The pass mark for ACCA exams is 50 percent.