# FINANCE

1.      City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

a.      If City Farm has \$5 million per day in collections and \$3 million per day in disbursements, how many dollars has the cash management system freed up?

b.      How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

a.      If the company has \$4 million per day in collections and \$2 million per day in disbursements, how many dollars will the cash management system free up?

b.      If the company can earn 9 percent per annum on freed-up funds, how much will the income be?

c.      If the annual cost of the new system is \$700,000, should it be implemented?

Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2003, it held 100,000 reals in Brazil worth 35,000 dollars. It drew 12 percent interest, but the Brazilian real declined 20 percent against the dollar.

a.      What is the value of its holdings, based on U.S. dollars, at year-end (Hint: multiply \$35,000 times 1.12 and then multiply the resulting value by 80 percent.)

b.      What is the value of its holdings, based on U.S. dollars, at year-end if it drew 9 percent interest and the real went up by 10 percent against the dollar?

Thompson Wood Products has credit sales of \$2,160,000 and accounts receivable of \$288,000. Compute the value of the average collection period.

7.      Darla’s Cosmetics has annual credit sales of \$1,440,000 and an average collection period of 45 days in 2008. Assume a 360-day year.

What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Knight Roundtable Co. has annual credit sales of \$1,080,000 and an average collection period of 32 days in 2008. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Lone Star Petroleum Co. has annual credit sales of \$2,880,000 and accounts receivable of \$272,000. Compute the value of the average collection period.

In Problem 7, if accounts receivable change to \$200,000 in the year 2009, while credit sales are \$1,800,000, should we assume the firm has a more or a less lenient credit policy?

Hubbell Electronic Wiring Company has an average collection period of 35 days. The accounts receivable balance is \$105,000. What is the value of its credit sales?

Marv’s Women’s Wear has the following schedule for aging of accounts receivable.

 Age of Receivables, April 30, 2004 (1) (2) (3) (4) Month of Sales Age of Account Amounts Percent of Amount Due April…………………………… 0–30 \$  88,000 ____ March…………………………. 31–60 44,000 ____ February……………………… 61–90 33,000 ____ January……………………….. 91–120 55,000 ____ Total receivables………… \$220,000 100%

a.      Fill in column (4) for each month.

b.      If the firm had \$960,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.

c.      If the firm likes to see its bills collected in 30 days, should it be satisfied with the average collection period?

d.      Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

e.      What additional information does the aging schedule bring to the company that the average collection period may not show?

Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of \$6 per order, and carrying costs of \$2.40 per pipe.

a.      What is the economic ordering quantity?

b.      How many orders will be placed during the year?

c.      What will the average inventory be?

Howe Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Howe anticipates sales of 126,000 units per year, an ordering cost of \$4 per order, and carrying costs of \$1.008 per unit.

a.      What is the economic ordering quantity?

b.      How many orders will be placed during the year?

c.      What will the average inventory be?

d.      What is the total cost of inventory expected to be?

(See Problem 12 for basic data.) In the second year, Howe Corporation finds it can reduce ordering costs to \$1 per order but that carrying costs will stay the same at \$1.008 per unit.

a.      Recompute a, b, c, and d in Problem 12 for the second year.

b.      Now compare years one and two and explain what happened.

Higgins Athletic Wear has expected sales of 22,500 units a year, carrying costs of \$1.50 per unit, and an ordering cost of \$3 per order.

a.      What is the economic order quantity?

b.      What will be the average inventory? The total carrying cost?

c.      Assume an additional 30 units of inventory will be required as safety stock. What will the new average inventory be? What will the new total carrying cost be?

Dimaggio Sports Equipment, Inc., is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by \$35,000, but inventory would increase by \$400,000. Dimaggio would have to finance the extra inventory at a cost of 10.5 percent.

a.      Should the company go ahead and switch to level production?

b.      How low would interest rates need to fall before level production would be feasible?

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