A large consulting
firm orders photocopying paper by the carton.
The firm pays a $30 delivery charge on each order.
The total cost of storing the paper, including
forgone interest, storage space, and deterioration,
comes to about $1.50 per carton per month. The
firm uses about 1,000 cartons of paper per month.
Following figures will be used to calculate the
economic order quantity (OEQ).
Order Size
100 200 250 500
Orders per month 10 5 4 2
Total order cost $300 $150 $120 $60
Average inventory 100 200 250 500
Total carrying costs $150 $300 $375 $750
Total inventory costs $450 $450 $495 $810
EOQ = Square root of 2(Usage in units)(Order
Cost per unit)
Carrying cost per unit
= Square root of 2(1000)($30)
$1.50
= Square root of 60000
$1.50
= Square root of 40000
= 200
Trade Credit and Receivables. A firm offers terms
of 2/15 net 30. Currently, two-thirds of all customers
take advantage of the trade discount; the remainders
pay bills at the due date.
a. What will be the firm’s typical value
for its accounts receivable period?
2/3rd customers (66.67%) pay within 15 days
1/3rd customers (33.33%) pay within 30 days
Weighted average 66.67*15 =1000.05
33.33*30 = 999.99
Total =1999.95
Typical accounts receivable period = 1999.95/100=
20 days
What is the average investment in accounts receivable
if annual sales are $20 million?
Average investment will be $20 m/12 months = $1.67m
per month
Average investment for 20 days it will be $1.67m/30*20days
= $1.11m
b. What would likely happen to the firm’s
accounts receivable period if it changed its terms
to 3/15, net 30?
More customers will be attracted to the quantity
discounts and will avail it. This will reduce
the accounts receivable period and the average
investment. However the trade discount figure,
a part of the annual profit and loss account,
will increase.
Problem 23 in the “Working Capital Management
and Short-Term Planning” section…Section
Two
Cash Budget. The following data are from the budget
of Ritewell Publishers. Half the company’s
sales are transacted on a cash basis. The other
half are paid for with a 1-month delay. The company
pays all of its credit purchases with a 1-month
delay. Credit purchases in January were $30 and
total sales in January were $180.
February March April
Total sales 200 220 180
Cash purchases 70 80 60
Credit purchases 40 30 40
Labor and administrative expenses 30 30 30
Taxes, interest, and dividends 10 10 10
Capital expenditures 100 0 0
Complete the following cash budget:
February March April
Sources of cash
Collections on current sales 100 110 90
Collections on accounts receivable 90 100 110
Total sources of cash 190 210 200
Uses of cash
Payments of accounts payable 30 40 30
Cash purchases 70 80 60
Labor and administrative expenses 30 30 30
Capital expenditures 100 0 0
Taxes, interest, and dividends 10 10 10
Total uses of cash 240 160 130
Net cash inflow -50 50 70
Cash at start of period 100 50 100
+ Net cash inflow -50 50 70
= Cash at end of period 50 100 170
+ Minimum operating cash balance 100 100 100
= Cumulative short-term financing required 150
0 -70
|