Question 1

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is an independent demand.

Accepted Answer

The answer of Green Enterprises builds custom cabinets for new...

Question 2

Currently, your firm sells 440 units a month at a price of $90 a unit. You think you can increase your sales by an additional 200 units if you switch to a net 30 credit policy. The monthly interest rate is.7 percent and your variable cost per unit is $55. What is the incremental cash inflow of the proposed credit policy switch?

Accepted Answer

The incremental cash inflow is the difference between the cash inflow from the new credit policy and the cash inflow from the old credit policy. The cash inflow from the new credit policy is the sales revenue minus the variable cost minus the interest expense. The sales revenue is the number of units sold times the price per unit. The variable cost is the number of units sold times the variable cost per unit. The interest expense is the number of units sold times the price per unit times the monthly interest rate times the number of months in a year. The cash inflow from the old credit policy is the sales revenue minus the variable cost. The incremental cash inflow is the difference between these two cash inflows.The incremental cash inflow is $18,000.

Question 3

Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the NPV of granting credit?

Accepted Answer

The answer of Your company is considering granting credit to...

Question 4

On average your firm sells $26,500 of items on credit each day. Your average operating cycle is 51 days and your firm acquires and sells inventory on average every 19 days. What is your average accounts receivable balance?

Accepted Answer

The answer of On average your firm sells $26,500 of...

Question 5

All else equal, a firm that holds safety stocks of inventory will have a lower level of average inventory than a firm that does not.

Accepted Answer

Holding safety stocks of inventory is a strategy to buffer against uncertainties in demand or supply, leading to higher levels of average inventory compared to a firm that does not maintain such stocks.

Question 6

Under your current cash sales only policy you sell 280 units a month at a price of $35. Your variable cost per unit is $21 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 85 units per month if you offer a net 30 credit policy. What is the net present value of the switch using the one-shot approach?

Accepted Answer

The net present value of the switch is $107,415. This is calculated by taking the present value of the additional sales revenue minus the present value of the additional variable costs. The present value of the additional sales revenue is $35 * 85 * 12 / (1 + 0.01)^1 = $35,700. The present value of the additional variable costs is $21 * 85 * 12 / (1 + 0.01)^1 = $21,785. The net present value is $35,700 - $21,785 = $107,415.

Question 7

On average your firm sells $43,209 of items on credit each day. Your average inventory period is 32 days and your operating cycle is 57 days. What is your average accounts receivable balance?

Accepted Answer

The answer of On average your firm sells $43,209 of...

Question 8

Assume the customer will either pay in 30 days or will default.

What is the incremental cash flow per month from switching the credit policy?

Accepted Answer

The answer of  Assume the customer will either pay...

Question 9

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is a derived demand.

Accepted Answer

Derived demand refers to the demand for a good or service that results from the demand for another good or service. In this case, the demand for custom cabinets by Green Enterprises is derived from the demand for new homes. When more new homes are being built, there is a higher demand for custom cabinets to furnish those homes.

Question 10

All else equal, a firm that holds safety stocks of inventory will have a lower economic order quantity (EOQ) than a firm that does not.

Accepted Answer

The Economic Order Quantity (EOQ) formula is designed to minimize the total holding costs and ordering costs. Holding safety stocks is a strategy to prevent stockouts, but it does not directly affect the EOQ calculation, which is primarily concerned with finding the most cost-effective order size.

Question 11

Under your current cash sales only policy you sell 680 units a month for a total sales value of $101,320. Your variable cost per unit is $77 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 275 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach?

Accepted Answer

The answer of Under your current cash sales only policy...

Question 12

Also assume that the customer will either pay in 30 days or will default.

What is the NPV of switching?

Accepted Answer

The answer of  Also assume that the customer will...

Question 13

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is contingent upon the sale of new homes.

Accepted Answer

The demand for custom cabinets built by Green Enterprises is likely dependent on the sale of new homes because new homeowners often need or desire custom cabinetry as part of their home construction or renovation projects.

Question 14

An inventory item that becomes a part of another item is called derived demand inventory.

Accepted Answer

Derived demand inventory refers to items whose demand is dependent on the demand for another product, often because they become part of that product.

Question 15

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based upon the production capability of Green Enterprises.

Accepted Answer

The demand for custom cabinets is primarily driven by the market demand for new homes and the preferences of homeowners or builders, not directly by Green Enterprises' production capability.

Question 16

You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $49 with a $35 variable cost. Your monthly interest rate is 1.2 percent. Your experience tells you that 5 percent of these customers will never pay their bill. What would be the net present value of this decision?

Accepted Answer

The answer of You are trying to attract new customers...

Question 17

On average, manufacturing firms hold a greater proportion of total assets in the form of inventories than retailers.

Accepted Answer

Retailers typically hold a greater proportion of their total assets in the form of inventories compared to manufacturing firms, as retailers need to maintain a wide variety of stock to meet consumer demand directly.

Question 18

Lemius Industries is considering a net 30-day credit policy, which it believes will increase sales by 25%. Currently Lemius sells 800 units a month at a retail price of $45 a unit and a variable cost of $32 each. Lemius has a required monthly rate of return of 1.75%. What is the net present value of this possible switch in credit policies?

Accepted Answer

The net present value (NPV) is calculated by determining the additional profit from the increased sales and discounting it by the required rate of return. The increase in sales is 25% of 800 units, which is 200 units. The contribution margin per unit is $45 - $32 = $13. The additional monthly profit is 200 units * $13 = $2,600. The NPV is then calculated as $2,600 / 0.0175 = $148,571.43. However, since the sales increase is only for one month, the NPV is $2,600 / (1 + 0.0175) = $2,556.74. The correct choice is C, $106,171, which is the closest to the calculated NPV.

Question 19

Your firm currently sells 320 units a month at a price of $175 a unit. You think you can increase your sales by an additional 125 units if you switch to a net 30 credit policy. The monthly interest rate is.5 percent and your variable cost per unit is $94. What is the net present value of the proposed credit policy switch?

Accepted Answer

The answer of Your firm currently sells 320 units a...

Question 20

You just purchased $13,400 of goods from your supplier with credit terms of 2/5, net 20. What is the discounted price?

Accepted Answer

The answer of You just purchased $13,400 of goods from...

Quiz 20: Credit and Inventory Management