Reference no: EM133033583

Question - Sphinx plc manufacturers a variety of electronic devices, including mobile phones, laptops, televisions and audio equipment. Sales are made directly to customers via Sphinx's website. However, the majority of sales are through the retail networks of various third-party distributors, who operate both online and through high street stores.

Sphinx is considering a number of changes to its operating model:

1. Increasing sales volume by 30%, via a major marketing campaign, with no change to product lines or mix.

2. Increasing sales volume by 30%, through introduction of a variety of new product lines, that will be sold along with existing products.

3. Taking advantage of an early payment discount offered by its major raw material supplier.

4. Saving costs by downsizing the credit control team by 20%.

5. Reducing credit terms to 3rd party distributors from 90 to 60 days.

i) Which of the proposed changes is most likely to create a "pull on liquidity"? Explain your answer in a single sentence.

ii) Which of the proposed changes is most likely to create a "drag on liquidity"? Explain your answer in a single sentence.

iii) Which of the proposed changes is most likely to result in a decrease in the operating cycle? xplain your answer in a single sentence.

iv) Which of the proposed changes is least likely to result in a change in the cash conversion cycle (also known as the net operating cycle)? Explain your answer in a single sentence

The early payment discount being considered in change 3 is "3/20 net 90". Calculate the effective annualised cost of the discount.

If Sphinx can borrow funds in the short-term money markets at 20%, should the trade discount be taken by Sphinx?