Table 1 shows the finance plan of a cosmetics business that has received a large order from a supermarket. It needs ingredients, containers and labels befor...
Question 1 Report
Table 1 shows the finance plan of a cosmetics business that has received a large order from a supermarket. It needs ingredients, containers and labels before the supermarket pays its invoice 60 days after delivery.
| Requirement | Amount ($) | Payment timing |
|---|---|---|
| Ingredients | 8,400 | Pay supplier in 30 days |
| Containers and labels | 3,600 | Pay immediately |
| Supermarket sales invoice | 18,000 | Received in 60 days |
(a) Identify the total manufacturing cost shown in Table 1. [1]
(b) Which source of finance could allow the business to receive money from the supermarket invoice earlier: factoring, retained profit or a mortgage? [1]
(c) Explain one disadvantage of factoring for this business. [2]
(d) Explain why finance is needed even though forecast sales are greater than manufacturing costs. [2]
Answer Details
(a) Total manufacturing cost = $8,400 + $3,600 = $12,000. [1]
(b) Factoring can allow the business to receive money from the supermarket invoice earlier. [1]
(c) A factoring company charges a fee or advances less than the full invoice value. This reduces the profit made from the supermarket order. [2]
(d) The ingredients and packaging costs must be paid before the supermarket pays the $18,000 invoice after 60 days. The business can therefore have a temporary cash-flow shortage even though sales revenue is greater than manufacturing cost and the order may be profitable overall. [2]
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