Question 1

Naomi Corporation is open all year, and has an annual demand of 20,000 units for its products. Its carrying cost per unit is $0.75, and its order costs are $120 per order. Additionally, the company wants to have 3 days' worth of sales in its inventory before it reorders. Given this information, calculate the company's reorder point.

Accepted Answer

The answer of Naomi Corporation is open all year, and...

Question 2

The most fashionable pair of roller skates sells for $45.99 a pair. Your store consistently sells 8,500 pairs of these roller skates year after year. The fixed costs to order more of this item is $70 and the carrying costs are $2.80 per pair. What is the economic order quantity?

Accepted Answer

The answer of The most fashionable pair of roller skates...

Question 3

Your company purchased $10,000 worth of inventory January 2 on credit. The terms of sale are 3/15 net 45. What is the effective annual interest rate if you pay the full amount in 45 days?

Accepted Answer

The answer of Your company purchased $10,000 worth of inventory...

Question 4

One popular child's toy sells for $39.99. Your store consistently sells 4,500 units of this toy year after year. The fixed costs to order more of this toy are $65 and the carrying costs are $1.45 per toy. What is the economic order quantity?

Accepted Answer

The answer of One popular child's toy sells for $39.99....

Question 5

What is the break-even sales increase?

Accepted Answer

The answer of What is the break-even sales increase?
...

Question 6

A firm offers credit terms of 1/5, net 15. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $2,000 purchase?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula for EAR when a discount is not taken. The terms 1/5, net 15 mean that the customer gets a 1% discount if they pay within 5 days; otherwise, the net (full) amount is due in 15 days. If the customer foregoes the discount, they are effectively borrowing the amount they could have saved for 10 days (15 days - 5 days). The discount they forego is 1% of $2,000, which is $20. So, they are paying an extra $20 on $1,980 (since they could have paid $1,980 instead of $2,000) for 10 days. To annualize this rate, we use the formula for EAR:EAR = (1 + i)^n - 1where i is the interest rate per period, and n is the number of periods per year. In this case, i = $20/$1,980 = 0.0101 (or 1.01%), and the period is 10 days. There are approximately 365/10 = 36.5 periods in a year.EAR = (1 + 0.0101)^36.5 - 1 ≈ 44.31%Therefore, the effective annual rate on the credit extended is approximately 44.31%.

Question 7

Your current sales consist of 25 units per month at a price of $200 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $215 a unit. The monthly interest rate is 2 percent. What is the break-even default rate of the proposed switch?

Accepted Answer

The answer of Your current sales consist of 25 units...

Question 8

A firm sells 45,000 units a year. It has an EOQ of 1,800 units. The firm offers its customers credit terms of 2/10, net 30. The firm uses a 360-day year. If both the firm and the customers operate in a manner that maximizes the benefits to them, the firm will have an operating cycle equal to ___ days.

Accepted Answer

The answer of A firm sells 45,000 units a year....

Question 9

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5'. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What is the economic order quantity (EOQ)?

Accepted Answer

The answer of Cindy's Toys has an average inventory of...

Question 10

Each year you sell 3,000 units of a product at a price of $29.99 each. The variable cost per unit is $18.72 and the carrying cost per unit is $1.43. You have been buying 250 units at a time. Your fixed cost of ordering is $30. What is the economic order quantity?

Accepted Answer

The answer of Each year you sell 3,000 units of...

Question 11

A board game sells for $29.99. Leo's Games consistently sells 3,500 units of this game year after year. The fixed cost to place an order is $52 and the carrying cost per game is $.80. What is the economic order quantity?

Accepted Answer

The answer of A board game sells for $29.99. Leo's...

Question 12

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 monthly interest rate is 0.8%. The customer will pay in 30 days if he does not default. If the customer does not default, he will buy one unit every month forever. What is the break-even default percent?

Accepted Answer

The break-even default percent can be calculated using the formula for the present value of a perpetuity: $PV = \frac{C}{r}$, where $PV$ is the present value, $C$ is the cash flow per period, and $r$ is the interest rate per period. Here, the cash flow per period ($C$) is the profit per unit, which is the selling price minus the variable cost ($165 - $150 = $15). The monthly interest rate ($r$) is 0.8%, or 0.008 in decimal form.First, calculate the present value of the perpetuity if the customer does not default: $PV = \frac{15}{0.008} = \$1875$.This present value represents the total value of all future profits from selling one unit per month forever at a profit of $15 per unit, discounted at the monthly interest rate of 0.8%.To find the break-even default percent, we need to determine what percentage of this present value can be lost to defaults before the deal becomes unprofitable. Since the cost to the company for each unit (if the customer defaults) is the variable cost of $150, the break-even point is when the loss equals the present value of the profits.The break-even default percent is calculated as the ratio of the variable cost per unit to the present value of the perpetuity: $\frac{150}{1875} = 0.08$ or 8%.However, this calculation seems to have been misunderstood in the context of the provided options, suggesting a mistake in the calculation process. Given the options and the correct approach to calculate the break-even default percent based on the provided formula and logic, the correct answer should reflect the proportion of the transaction that can be lost to defaults before the deal becomes unprofitable, considering the profit margin and the interest rate. The mistake in the calculation above indicates a reevaluation is necessary, focusing on the correct interpretation of the perpetuity value and the impact of defaults on it. Given the options and the typical approach to such financial calculations, the correct answer should align with the principles of financial analysis, but the provided calculation does not accurately lead to any of the given options directly. The correct approach involves assessing the net present value of the cash flows and determining the default rate at which the net present value would be zero, considering the profit per unit and the cost of capital. However, without the precise recalculated figures based on the correct formula application, the selection provided earlier was incorrect. The correct interpretation involves a deeper financial analysis, potentially incorporating the expected loss due to defaults and its impact on the net present value of the future cash flows.

Question 13

Your company purchased $10,000 worth of inventory on January 2 on credit. The terms of sale are 3/15 net 45. What is the annual percentage rate if you pay the full amount in 45 days?

Accepted Answer

The answer of Your company purchased $10,000 worth of inventory...

Question 14

Babylon Corporation has an annual demand of 400,000 units for its products. Its carrying cost per unit is $0.75, and its order costs are $120 per order. Given this information, calculated the number of orders the company will make during the year.

Accepted Answer

The answer of Babylon Corporation has an annual demand of...

Question 15

What is the break-even default rate?

Accepted Answer

The break-even default rate is the rate at which the expected loss from defaults equals the yield spread over the risk-free rate. In this context, 4.8% is the correct break-even default rate.

Question 16

One of the primary products your firm offers sells for $42.99 a unit. The variable cost per unit is $27.30 and the carrying cost per unit is $.36. You sell 4,250 of these units each year. The fixed cost to order this item is $32. What is the economic order quantity?

Accepted Answer

The economic order quantity (EOQ) is the optimal quantity of inventory to order at a time to minimize the total inventory costs. The EOQ is calculated using the following formula:EOQ = √(2*D*O)/Hwhere:D = annual demandO = ordering costH = carrying cost per unitIn this case, the annual demand is 4,250 units, the ordering cost is $32, and the carrying cost per unit is $0.36. Plugging these values into the formula, we get:EOQ = √(2*4,250*$32)/$0.36 = 869 unitsTherefore, the economic order quantity is 869 units.

Question 17

Your company currently sells a product with a variable cost per unit of $16 and a unit selling price of $31. At the present time, your company only sells on a cash basis and has monthly sales of 310 units. The monthly interest rate is 2 percent. Your company is considering switching to a net 30 credit policy. What is the switch break-even point?

Accepted Answer

The switch break-even point is calculated by considering the additional cost of offering credit, which is the opportunity cost of not having cash immediately. The contribution margin per unit is $31 - $16 = $15. The interest cost per unit is 2% of $31, which is $0.62. The break-even point is where the additional units sold cover the interest cost: 310 + (310 * 0.62 / 15) = 323 units.

Question 18

Bridgewater, Inc. currently sells 4,500 units a month for total monthly sales of $285,000. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $48 and the monthly interest rate is 1.5 percent. What is the switch break-even point?

Accepted Answer

The break-even point is calculated by determining the additional units needed to cover the cost of offering credit. The contribution margin per unit is the selling price minus the variable cost. The interest cost per unit is the selling price times the monthly interest rate. Solving for the break-even point gives 4,793 units.

Question 19

Bhattia Inc. has credit terms of 2/15, net 60. Based on experience, 70% of all customers will take the discount. Given this information, calculate average collection period.

Accepted Answer

The average collection period can be calculated by taking into account the percentage of customers who take the discount and those who don't. For the 70% who take the discount, the collection period is 15 days. For the remaining 30%, it's 60 days. The calculation is as follows: (70% * 15 days) + (30% * 60 days) = 10.5 days + 18 days = 28.5 days.

Question 20

What is the effective annual rate of credit terms of 2/20, net 45?

Accepted Answer

The effective annual rate (EAR) for the given credit terms of 2/20, net 45 can be calculated using the formula for EAR when discounts are involved. The discount here is 2%, which is available if the payment is made within 20 days, otherwise, the full amount is due in 45 days. The period after the discount period until the net due date is 25 days (45-20). The EAR can be calculated as follows:EAR = (1 + (discount rate / (1 - discount rate)))^(365/days past discount) - 1Plugging in the values:EAR = (1 + (0.02 / (1 - 0.02)))^(365/25) - 1EAR ≈ 34.31%Therefore, the correct answer is 34.31%.

Quiz 20: Credit and Inventory Management