BB's Basement, a bargain retail outlet, purchases $4,000 of end of line clothing inventory from J&P Manufacturing and is granted credit terms of 45 days. BB sells out the inventory for $6,000 within two weeks. Proceeds from the sale after salaries, rent and other expenses, but before paying off accounts payable, is $4,500. If BB can make 3% per annum on a 30-day Guaranteed Investment Certificate (GIC), how much did BB make on the jeans and on managing its working capital?

Question

Quizplus · Accepted Answer

BB's profit on the jeans can be calculated by subtracting the cost of inventory purchased ($4,000) from the proceeds of sale ($6,000), which gives $2,000.

BB has a net working capital of $4,500 - $4,000 = $500 after paying off the accounts payable. BB can invest this $500 for 45 days and earn interest. The interest earned can be calculated as follows:

Interest = (3%/365) * ($500) * 45 = $1.23

Therefore, BB's total profit is $2,000 + $1.23 = $511. Option C is the correct answer.

BB's Basement, a Bargain Retail Outlet, Purchases $4,000 of End