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Category

$250,000

20 days Full

3yo

A

$540,000

45 days Restricted

6'30

B

90 days

C 10% No credit $O , O

8 OO O

Gross profit approximates 12 percent of sales. The rate of return is 18 percent.

Should credit be extended to categories B and C?

SOLUTION

Category C

Category B

Gross profit

$540,000 X 0.12

$800,000 X 0.12 $64,800 $96,000

Less: Increased bad debts

-32,400

$540,000 X 0.06

-80,000

$800,000 X 0.10

Incremental investment in average

accounts receivable

$59,400

(45/360) X 0.88 X $540,000

(90/360) X 0.88 X $800,000 $176,000

Rate of return X 0.18

0.18

X

-10,692

Opportunity cost -31,680

Net profit $21,708 -$15,680

Credit should be extended only to category B.

Materials Cost. Grason Corporation purchases 3,000units of a raw material at a list price of $5

4.21

each. The supplier offers a quantity discount of 4 percent. What is the material cost of the

item?

SOLUTION

Acquisition cost (3,000 X $5) $lS,OOo

Less: Discount (0.04 X $15,000) 600

Net cost $14,400

Average Investment in Inventory. West Corporation orders 4,000 units of a product at the

4.22

beginning of the period for $7 each. What is West Corporation's average investment in

inventory?

125

THE MANAGEMENT OF WORKING CAPITAL

CHAP. 41

SOLUTION

2,000 units

Average inventory (Q/2 = 4,000/2)

x7

Unit cost ($)

$14,000

Average investment

Ordering Cost. Charles Corporation uses 8,500 units per year. Each order is for 200 units. The

4.23

cost per order is $13. What is the total ordering cost for the year?

SOLUTION

8,500

$13 = $552.50

X

200

Economic Order Quantity. Luster Corporation presents the following data: Usage is 400 units

4.24

per month, cost per order is $20, and carrying cost per unit is $6.

Given these data, answer the' following questions: (a)What is the economic order quantity?

( b )How many orders are required each month? (c) How often should each order be placed?

E- /F-

SOLUTION

/F=

EOQ= 52 (rounded)

400 8(rounded)

-=-=

EOQ 52

31

-= every 4 days

8

Stockout Cost. Boston Corporation uses 30,000 units. Each order placed is for 1,500units. The

4.25

stockout units is 300. Management is willing to accept a stockout probability of 40 percent. The

stockout cost per unit is $3.20. What is the total stockout cost?

SOLUTION

usage

x stockout units X unit stockout cost X probability of stockout

Stockout cost =

order quantity

--

- 307000X 300 X $3.20 X 0.4 = $7,680

1,500

Economic Order Point. Met Corporation reports the following data regarding one of its

4.26

inventory items: Usage is 5,000 units per month, EOQ is units, and lead time is month. The

stockout acceptance factor is 1.29, which represents an acceptable stockout percentage of 10

percent.

Determine the economic order point.

SOLUTION

EOP = S L + ˜ S ( E O Q ) ( L )

(5,000)(4) + 1.29˜5,000(100)($)

=

= 2,500 + 1.29˜250,000 2,500 + 1.29(500) = 3,145

=

[CHAP. 4

126 THE MANAGEMENT OF WORKING CAPITAL

Inventory Management. XYZ Appliance Store sells an average of 160 units per month. Each

4.27

order the store places is for 300 units. The cost per unit is $5. The cost per order is $12. Carrying

cost is $0.15 per dollar invested per year. The rate of return is 18 percent. The tax rate is 46

percent.

(a) What is the investment in average inventory? ( b ) What is the annual ordering cost? ( c )

What is the annual holding cost? ( d )What is the opportunity cost of holding inventory? (e) What

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