Reference no: EM132522982

ACTIVITY

Invicta Engineering (IE) is a small private limited company that manufactures mechanical components. Its main customers are other businesses which manufacture domestic appliances such as washing machines, vacuum cleaners and refrigerators.

The owners of IE are considering how to finance the purchase of a new machine. The machine has a capital cost of $14 000.

The directors of IE want to use internal sources of finance to fund the purchase of the machine. They have asked Kasinda, the company's finance manager, to provide them with relevant financial data. This is shown in the table below.

Table 19.1 Extract from IE's most recent quarterly financial statement Notes:
IE holds enough raw material inventories for three weeks' production.
IE gives customers 30 days' credit.

The finance director has suggested reducing the raw material inventories so that IE only holds enough for one week's production. The operations director disagrees. He proposes reducing the level of finished goods inventories by 50%. The marketing director disagrees with this proposal.

Question 1 Explain why the directors of IE decided against using any of the current cash balance to finance the purchase of the new machine.

Question 2 Explain one limitation to IE of the finance director's proposal to reduce raw material inventories.

Question 3 Explain why you think the marketing director disagrees with the operation director's proposal for finished goods inventories.

Question 4 Discuss how the directors of IE might raise the $14 000 from within its working capital.