Question 1

Novelty Gifts Inc. is experiencing some inventory control problems. The manager, Wanda LaRue, currently orders 10,000 units four times each year to handle the annual demand of 40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units.
a) What is Novelty Gifts' current total annual inventory cost?
b) Calculate the economic ordering quantity (EOQ).
c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units.
d) Calculate total annual inventory cost under EOQ. How does this compare to her current inventory costs?

Accepted Answer

The answer of Novelty Gifts Inc. is experiencing some inventory...

Question 2

Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $1,000,000, a high 15% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 30%.
a) Calculate Tanner's incremental net income on the new sales.
b) Assume Tanner has a receivables turnover of 4. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment.
c) Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?

Accepted Answer

The answer of Tanner Co. is a highly successful supplier...

Question 3

We expect that we can receive annual incremental income after taxes of $25,000, including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firm's minimum required after-tax return is 8%?

Accepted Answer

To find the maximum commitment to Accounts Receivable (A/R) that the firm should be willing to assume, we divide the annual incremental income after taxes by the firm's minimum required after-tax return rate. Thus, $25,000 / 0.08 = $312,500.

Question 4

All of the following are examples of carrying costs except

Accepted Answer

Carrying costs refer to the expenses that a company incurs in order to hold and maintain inventory. Shipping costs are not considered carrying costs, as they are associated with the movement of goods and not their storage or maintenance. Interest expense, warehouse space, and insurance premiums are all examples of carrying costs.

Question 5

Level production offers all of the following benefits except

Accepted Answer

Level production is a strategy that aims to maintain a stable level of production to meet the average demand over a certain period of time. By doing so, it can reduce overtime usage and increase the use of capacity. However, it may not lead to greater storage space as maintaining a constant production level means that there may be times when production exceeds demand, leading to excess inventory.

Question 6

Assuming that we can earn a 10% return on accounts receivable, which of the following strategies to finance an increase in our accounts receivable balance would be optimal?

Accepted Answer

Financing the increase in accounts receivable with a bank loan costing 8% is optimal because it is the lowest cost option compared to the returns of the other choices, and it allows earning a higher return of 10% on the accounts receivable.

Question 7

If a company can implement cash management systems and save three days by reducing remittance time and one day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and their return on freed-up funds is 10%, what is the maximum that they should spend on the system?

Accepted Answer

The company saves 3 days on remittances and 1 day on disbursements, freeing up funds for 4 days. The total freed-up funds are $2,000,000 * 3 + $2,500,000 * 1 = $8,500,000. With a 10% return, the annual benefit is $8,500,000 * 0.10 = $850,000. Thus, the maximum they should spend is $850,000.

Question 8

Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit, and desires to keep 100 units in safety stock. Assuming level production, what should be their average inventory?

Accepted Answer

First, let's calculate the Economic Order Quantity (EOQ) using the formula:
EOQ = sqrt((2DS)/H)
where 
D = demand = 20,000 units/year
S = ordering cost = $20/order
H = carrying cost = $1/unit/year

EOQ = sqrt((2*20,000*20)/1) = 400 units/order

Since we want to maintain a safety stock of 100 units, the average inventory would be:

Average Inventory = EOQ/2 + SS
where SS = safety stock = 100 units

Average Inventory = 400/2 + 100 = 300 units

Therefore, the best choice is D, which includes a range of 501-600.

Question 9

The inventory decision model provides which type of information?

Accepted Answer

The inventory decision model provides information on the optimal order size, which is the quantity of inventory to be ordered at once, taking into account factors such as demand, lead time, and order costs. This information can help organizations minimize ordering costs while still meeting customer demand. The model does not provide information on the optimal total inventory, optimal safety stock, or optimal carrying cost per unit.

Question 10

Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. The firm receives daily collections of $2.0 million, and could earn 6% on any funds freed up through faster collections. If the lockbox system can save two days in the collection process, and the firm's bankers will charge $200,000 per year to operate the lockbox system, is it worth it to establish the system?

Accepted Answer

The answer of Linkup Systems, which provides investors with computerized...

Question 11

Mountain Home Systems Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $3 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 3% on all new sales, and the firm's production and selling costs are 80% of sales. Mountain Home's tax rate is 30%.
a) Calculate Mountain Home's additional net income from the new sales.
b) If Mountain Home can turn its receivables over four times per year, what will its additional investment in accounts receivable be and what will the firm earn as an after-tax return on that investment?
c) Mountain Home management requires that any new project earn a minimum of 10% return on investment. Should the firm enter the car-telephone manufacturer market?

Accepted Answer

The answer of Mountain Home Systems Inc. is a well-known...

Question 12

All of the following are methods of controlling receivables except

Accepted Answer

Reducing cash sales does not affect the control of receivables since cash sales do not create receivables. The other options (offering cash discounts, reducing net terms, and using DBIS) are all methods used to manage and control receivables.

Question 13

The Milling Corp. has developed a new type of widget. The local distributor expects to increase his sales by 25% over the past year due to this new development. Last year's sales were $150,000 at a selling price of $100 per unit. A safety stock of 35 units has eliminated stockouts. The manager would like to cut costs as much as possible, so he has come to you for advice. $\begin{array} { l l } 
\text { Warehouse space } & \$ 2.50 / \text { unit } \
\text { Material Handling Expense } & \$ 1.50 / \text { unit } \
\text { Insurance Premium } & \$ 1.00 / \text { unit } \
\text { Total ordering cost } & \$ 100.00 / \text { per order }
\end{array}$ a) What is the economic order quantity?
b) What is the amount of average inventory?
c) How many orders will be made per year?
d) What is the total cost of this inventory decision?

Accepted Answer

The answer of The Milling Corp. has developed a new...

Quiz 7: Current Asset Management