Company A operates a wholesale building materials and supplies business, selling to residential and commercial construction contractors. A major competitor is located nearby. The competitor carries a sizeable inventory. Ninety percent of the competitor s sales are on a credit basis. Company A s goal is to optimize its profit margin while increasing its share of market by at least 10 percentage points by the end of two years.

Company A operates a wholesale building materials and supplies business, selling to residential and commercial construction contractors. A major competitor is located nearby. The competitor carries a sizeable inventory. Ninety percent of the competitor s sales are on a credit basis. Company A s goal is to optimize its profit margin while increasing its share of market by at least 10 percentage points by the end of two years.

Task:

Write a brief essay (suggested length of 2 3 pages) in which you describe how to determine the optimal investment in current assets for the situation given above. In your essay:

A. Describe the actions Company A might take under a short term financial policy that is flexible with regard to current assets.

B. Describe the actions Company A might take under a short term financial policy that is restrictive with regard to current assets.

C. Identify the main components of carrying costs.
1. Discuss the behavior of these costs as the level of investment in current assets increases and decreases.

D. Identify the main components of shortage costs.
1. Discuss the behavior of these costs as the level of investment in current assets increases and decreases.

E. Describe the general steps used to determine the optimal investment in current assets in the situation outlined above in Given.








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