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Financial Management

(B. Working Capital Management)

Working capital anag!!nt
1. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.
17. Te goal of managing !orking capital" suc as inventor#" sould be to minimi$e te:
A. costs of carr#ing inventor#
B. opportunit# cost of capital
C. aggregate of carr#ing and sortage costs
D. amount of spoilage or pilferage
Working capital "inancing polic#
%. &ap Compan# follo!s an aggressive financing polic# in its !orking capital management !ile
&ing Corporation follo!s a conservative financing polic#. Wic one of te follo!ing
statements is correct'
A. &ap as lo! ratio of sort(term debt to total debt !ile &ing as a ig ratio of sort(
term debt to total debt.
B. &ap as a lo! current ratio !ile &ing as a ig current ratio.
C. &ap as less liquidit# risk !ile &ing as more liquidit# risk.
D. &ap finances sort(term assets !it long(term debt !ile &ing finances sort(term
assets !it sort(term debt.
). Wic of te follo!ing !ould increase risk'
A. *aise te level of !orking capital.
B. Decrease te amount of inventor# b# formulating an effective inventor# polic#.
C. +ncrease te amount of sort(term borro!ing.
D. +ncrease te amount of equit# financing.
,. As a compan# becomes more conservative !it respect to !orking capital polic#" it !ould
tend to ave a-n.
A. +ncrease in te ratio of current liabilities to noncurrent liabilities.
B. +ncrease in te operating c#cle.
C. Decrease in te operating c#cle.
D. +ncrease in te ratio of current assets to current liabilities.
0. 1ort(term financing plans !it ig liquidit# ave:
A. ig return and ig risk
B. moderate return and moderate risk
C. lo! profit and lo! risk
D. none of te above
T!porar# $ P!ran!nt %orking capital
2. Temporar# !orking capital supports
A. te cas needs of te compan#. C. acquisition of capital equipment.
B. pa#ment of long term debt. D. seasonal peaks.
Ca&' Manag!!nt
/otives for olding cas
7. Te transaction motive for olding cas is for:
A. a safet# cusion C. compensating balance requirements
B. dail# operating requirements D. none of te above
4. Te difference bet!een te cas balance on te firm5s books and te balance so!n on te
bank statement is called:
A" te compensating balance C. a safet# cusion
B. float D. none of te above
Cas conversion c#cle
6. Te lengt of time bet!een pa#ment for inventor# and te collection of cas is referred to as:
A. pa#ables deferral period C. operating c#cle
B. receivables conversion period D. cas conversion c#cle
17. As a firm5s cas conversion c#cle increases" te firm:
A. becomes less profitable
Financial Management
(B. Working Capital Management)
B. increases its investment in !orking capital
C. reduces its accounts pa#able period
D. incurs more sortage costs
11. Te longer te firm5s accounts pa#able period" te:
A. longer te firm5s cas conversion c#cle is.
B. sorter te firm5s inventor# period is.
C. more te dela# in te accounts receivable period.
D. less te firm must invest in !orking capital.
1,. Te average lengt of time a peso is tied up in current asset is called te:
A. net !orking capital. C. receivables conversion period.
B. inventor# conversion period. D. cas conversion period.
R!c!i(a)l!& anag!!nt
10. All of tese factors are used in credit polic# administration e8cept:
A. credit standards C. peso amount of receivables
B. terms of trade D. collection polic#
12. Wic of te follo!ing statements is most correct' +f a compan# lo!ers its D19" but no
canges occur in sales or operating costs" ten:
A. te compan# migt !ell end up !it a iger debt ratio.
B. te compan# migt !ell end up !it a lo!er debt ratio.
C. te compan# !ould probabl# end up !it a iger *9:.
D. te compan#5s total asset turnover ratio !ould probabl# decline.
1%. All but !ic of te follo!ing is considered in determining credit polic#'
A. Credit standards C. Accounts pa#able deferral period
B. Credit limits D. Collection efforts
In(!ntor# anag!!nt
1). Te use of safet# stock b# a firm !ill:
A. reduce inventor# costs C. ave no effect on inventor# costs
B. increase inventor# costs D. none of te above
14. Wen a specified level of safet# stock is carried for an item in inventor#" te average
inventor# level for tat item
A. decreases b# te amount of te safet# stock.
B. is one(alf te level of te safet# stock.
C. +ncreases b# one(alf te amount of te safet# stock.
D. +ncreases b# te number of units of te safet# stock.
16. Wic of te follo!ing statements is correct for a firm tat currentl# as total costs of carr#ing
and ordering inventor# tat are %7; iger tan total carr#ing costs'
A. Current order si$e is greater tan optimal
B. Current order si$e is less tan optimal
C. <er unit carr#ing costs are too ig
D. Te optimal order si$e is currentl# being used
Tra*! cr!*it
,7. Wit credit terms of 0=4" n=07" !at is te customer>s pa#ment decision date'
A. Tree da#s after te invoice is received.
B. Te 4t da# is te customer>s decision date.
C. An#time during te period" 4t to te 07t.
D. Te 07t da# is te primar# decision date.
Working capital "inancing
. Casie Compan# turns out ,77 calculators a da# at a cost of <,%7 per calculator for materials
and variable conversion cost. +t takes te firm 14 da#s to convert ra! materials into
calculator. Casie>s usual credit terms e8tended to its customers is 07 da#s" and te firm
generall# pa#s its suppliers in ,7 da#s.
+f te foregoing c#cles are constant" !at amount of !orking capital must Casie Compan#
A. <1"277"777 C. < 677"777
B. <,"277"777 D. <1"477"777
Ca&' con(!r&ion c#cl!
. ?uke Compan# as an inventor# conversion period of )7 da#s" a receivables conversion
period of 2% da#s" and a pa#ments c#cle of 07 da#s. Wat is te lengt of te firm>s cas
conversion c#cle'
A. 67 da#s C. %2 da#s
B. 7% da#s D. 17% da#s
Financial Management
(B. Working Capital Management)
. Te 1pades Compan# as an inventor# conversion period of 7% da#s" a receivables
conversion period of 04 da#s" and a pa#able pa#ment period of 07 da#s. Wat is te lengt of
te firm>s cas conversion c#cle'
A. 40 da#s C. )7 da#s
B. 110 da#s D. 2% da#s
. 1amaritan 1upplies" +nc. as <% million in inventor# and <, million in accounts receivable. +ts
average dail# sales are <177"777. Te compan# as <1.% million in accounts pa#able. +ts
average dail# purcases are <%7"777. Wat is te lengt of te compan#>s cas conversion
A. %7 da#s C. 07 da#s
B. ,7 da#s D. 27 da#s
Da#s inventor#
. Wat is te inventor# period for a firm !it an annual cost of goods sold of <4 million" <1.%
million in average inventor#" and a cas conversion c#cle of 7% da#s'
A. ).%) da#s C. %,.)7 da#s
B. 14.7% da#s D. )7.%7 da#s
. 1amaritan 1upplies" +nc. as <% million in inventor# and <, million in accounts receivable. +ts
average dail# sales are <177"777. Te compan# as <1.% million in accounts pa#able. +ts
average dail# purcases are <%7"777. Wat is te lengt of te compan#>s inventor#
conversion period'
A. %7 da#s C. 1,7 da#s
B. 67 da#s D. 27 da#s
Ca&' anag!!nt
:conomic conversion quantit# -:C@.
. 1imile +nc. as a total annual cas requirement of <6"77%"777 !ic are to be paid
uniforml#. 1imile as te opportunit# to invest te mone# at ,2; per annum. Te compan#
spends" on te average" <27 for ever# cas conversion to marketable securities.
Wat is te optimal cas conversion si$e'
A. <)7"777 C. <2%"777
B. <%%"777 D. <7,"%77
9pportunit# cost
. A#perbole Corporation estimates its total annual cas disbursements of <0",%1",%7 !ic
are to be paid uniforml#. A#perbole as te opportunit# to invest te mone# at 6; per
annum. Te compan# spends" on te average" <,% for ever# cas conversion to marketable
securities and vice versa.
Wat is te opportunit# cost of keeping cas in te bank account'
A. <0"4,%.77 C. <2"167.77
B. <1"61,.%7 D. < 144.%%
Annual savings
. Wat are te e8pected annual savings from a lock(bo8 s#stem tat collects 1%7 cecks per
da# averaging <%77 eac" and reduces mailing and processing times b# ,.% and 1.% da#s
respectivel#" if te annual interest rate is 7;'
A. < %",%7 C. < ,1"777
B. < 10"1,% D. <077"777
R!c!i(a)l!& anag!!nt
Carr#ing cost
. Te Camp Compan# as an inventor# conversion period of )7 da#s" a receivable
conversion period of 07 da#s" and a pa#able pa#ment period of 2% da#s. Te Camp>s
variable cost ratio is )7 percent and annual fi8ed costs of <)77"777. Te current cost of
capital for Camp is 1,;.
+f Camp>s annual sales are <0"07%"777 and all sales are on credit" !at is te firm>s carr#ing
cost on accounts receivable" using 0)7 da#s #ear'
A. <,41",%7 C. < ,7",%7
B. <1)4"7%7 D. < %)",%7
Average receivables
. CaBa Compan# sells on terms 0=17" net 07. Total sales for te #ear are <677"777. 3ort#
percent of te customers pa# on te tent da# and take discountsC te oter )7 percent pa#"
on average" 2% da#s after teir purcases.
Wat is te average amount of receivables'
A. <77"777 C. <77",77
B. <77"%77 D. <)7"%77
. <alm Compan#>s budgeted sales for te coming #ear are <27"%77"777 of !ic 47; are
e8pected to be credit sales at terms of n=07. <alm estimates tat a proposed rela8ation of
credit standards !ill increase credit sales b# ,7; and increase te average collection period
from 07 da#s to 27 da#s. Based on a 0)7(da# #ear" te proposed rela8ation of credit to
Financial Management
(B. Working Capital Management)
standards !ill result in an e8pected increase in te average accounts receivable balance of
A. < %27"777 C. <,"777"777
B. < 677"777 D. <1"),7"777
+nvestment in receivables
. Currentl#" ?a Carlota Compan# as annual sales of <,"%77"777. +ts average collection
period is 2% da#s" and bad debts are 0 percent of sales. Te credit and collection manager
is considering instituting a stricter collection polic#" !ereb# bad debts !ould be reduced to
1.% percent of total sales" and te average collection period !ould fall to 07 da#s. Ao!ever"
sales !ould also fall b# an estimated <077"777 annuall#. Dariable costs are 7% percent of
sales and te cost of carr#ing receivables is 17 percent. Assume a ta8 rate of 27 percent
and 0)7 da#s per #ear.
Wat !ould be te decrease in investment in receivables if te cange !ere made'
A. < 6")44 C. < 6)"47%
B. < 1,"644 D. <1,6"67%
@uestion Eos. 12 troug 1) are based on te follo!ing data:
1onata Compan# is considering canging its credit terms from ,=1%" net 07 to 0=17" net 07 in
order to speed collections. At present" 27 percent of 1onata Compan#Fs customers take te ,
percent discount. Gnder te ne! term" discount customers are e8pected to rise to %7 percent.
*egardless of te credit terms" alf of te customers !o do not take te discount are e8pected
to pa# on time" !ereas te remainder !ill pa# 17 da#s late. Te cange does not involve a
rela8ation of credit standardsC terefore bad debt losses are not e8pected to rise above teir
present , percent level. Ao!ever" te more generous cas discount terms are e8pected to
increase sales from <, million to <,.) million per #ear. 1onata Compan#>s variable cost ratio is
7% percent" te interest rate on funds invested in accounts receivable is 6 percent" and te firm>s
income ta8 rate is 27 percent.
. Wat are te da#s sales outstanding -D19. before and after te cange of credit polic#'
A. ,7.7 da#s and ,,.% da#s" respectivel# C. ,,.% da#s and ,1.% da#s" respectivel#
B. ,,.% da#s and ,7.7 da#s" respectivel# D. ,1.% da#s and ,,.% da#s respectivel#
. Te incremental carr#ing cost on receivable is
A. < 420.7% C. < )20.7%
B. <4"446.77 D. <)"))7.77
. Te incremental after ta8 profit from te cange in credit terms is
A. <)4"260 C. <)7")1%
B. <)%")27 D. <%7")1%
In(!ntor# anag!!nt
. Wat is te economic order quantit# for te follo!ing inventor# polic#: A firm sells 0,"777 bags
of premium sugar per #ear. Te cost per order is <,77 and te firm e8periences a carr#ing
cost of <7.47 per bag.
A. ,"777 bags C. 4"777 bags
B. 2"777 bags D. 1)"777 bags
Annual demand
. /arsman Co. as determined te follo!ing for a given #ear:
:conomic order quantit# -standard order si$e. %"777 units
Total cost to place purcase orders for te #ear <27"777
Cost to place one purcase order < 177
Cost to carr# one unit for one #ear < 2
Wat is /arsman>s estimated annual usage in units'
A. 1"777"777 C. %77"777
B. ,"777"777 D. 1"%77"777
*equired annual return on investment
. B+B9 Compan# is a distributor of videotapes. <irate /art is a local retail outlet !ic sells
blank and recorded videos. <irate /art purcases tapes from B+B9 Compan# at <077.77
per tapeC tapes are sipped in packages of ,7. B+B9 Compan# pa#s all incoming freigt"
and <irate /art does not inspect te tapes due to B+B9 Compan#5s reputation for ig
qualit#. Annual demand is 172"777 tapes at a rate of 2"777 tapes per !eek. <irate /art
earns ,7; on its cas investments. Te purcase(order lead time is t!o !eeks.
Te follo!ing cost data are available:
*elevant ordering costs per purcase order <47 <67.%7
Carr#ing costs per package per #ear 0
*elevant insurance" materials andling" breakage" etc." per #ear , < 2.%7
Wat is te required annual return on investment per package'
A. <)"777 C. <1",77
B. < ,%7 D. < )77
Financial Management
(B. Working Capital Management)
9rder quantit#
. 3or *a! /aterial ?1," a compan# maintains a safet# stock of %"777 pounds. +ts average
inventor# -taking into account te safet# stock. is 1,"777 pounds. Wat is te apparent order
A. 14"777 lbs. C. 12"777 lbs.
B. )"777 lbs. D. ,2"777 lbs
9ptimal safet# stock level
. :ac stockout of a product sold b# Arnis Co. costs <1"7%7 per occurrence. Te compan#>s
carr#ing cost per unit of inventor# is <% per #ear" and te compan# orders 1"%77 units of
product ,7 times a #ear at a cost of <177 per order. Te probabilities of a stockout at
various levels of safet# stock are:
Gnits of 1afet# 1tock <robabilit# of 1tockout
7. 7.%7
177. 7.07
,77. 7.12
077. 7.7%
277. 7.71
Te optimal safet# stock level for te compan# based on te units of safet# stock level
above is
A. ,77 units C. 177 units
B. 077 units D. 277 units
. <aeng Compan# uses te :9@ model for inventor# control. Te compan# as an annual
demand of %7"777 units for part number )77, and as computed an optimal lot si$e of )",%7
units. <er(unit carr#ing costs and stockout costs are <6 and <2" respectivel#. Te follo!ing
data ave been gatered in an attempt to determine an appropriate safet# stock level:
Gnits 1ort Because of :8cess
Demand during te ?ead Time <eriod
Eumber of Times 1ort
in te last 27 *eorder C#cles
177 4
,77 17
077 12
277 4
Wat is te optimal safet# stock level'
A. 177 units C. ,77 units
B. 077 units D. 277 units
Annual inventor# costs
. Durable 3urniture Compan# uses about ,77"777 #ards of a particular fabric eac #ear. Te
fabric costs <,% per #ard. Te current polic# is to order te fabric four times a #ear.
+ncremental ordering costs are about <,77 per order" and incremental carr#ing costs are
about <7.7% per #ard" muc of !ic represents te opportunit# cost of te funds tied up in
Ao! muc total annual costs are associated !it te current inventor# polic#'
A. <16"%%7 C. <04"077
B. <14"7%7 D. <),"%77
/a8imum interest rate
. Earra Compan# is considering a s!itc to level production. Cost efficiencies !ill occur
under level production and after ta8 cost !ould decline b# <77"777 but inventor# !ould
increase from <1"777"777 to <1"477"777. Earra !ould ave to finance te e8tra inventor# at
a cost of 17.% percent.
Wat is te ma8imum interest rate tat makes level production feasible'
A. 7.77 percent C. 4.7% percent
B. %.40 percent D. 17.77 percent
9pportunit# cost
. Diesel 3asion estimates tat 67"777 $ippers !ill be needed in te manufacture of ig
selling products for te coming #ear. +ts supplier quoted a price of <,% per $ipper. Diesel
planned to purcase 7"%77 units per mont but its supplier could not guarantee tis deliver#
scedule. +n order to ensure availabilit# of tese $ippers" Diesel is considering te purcase
of all tese 67"777 units on Hanuar# 1. Assuming Diesel can invest cas at 1,;" te
compan#>s opportunit# cost of purcasing te 67"777 units at te beginning of te #ear is
A. <1,7"%77 C. <1,0"7%7
B. <10%"777 D. <,)2"777
Tra*! cr!*it
. +f a firm is given a trade credit terms of ,=17" net 07" ten te cost to te firm failing to take te
discount is:
A. ,.7;. C. 0).7;
B. 07.7;. D. 17.7;.
. Te cost of discounts missed on credit terms of ,=17" n=)7 is
Financial Management
(B. Working Capital Management)
A. ,.7 percent C. 1,.2 percent
B. 12.6 percent D. ,1., percent
Bank loan&
Discount loan
. Iou plan to borro! <17"777 from #our bank" !ic offers to lend #ou te mone# at a 17
percent nominal" or stated" rate on a one(#ear loan. Wat is te effective interest rate if te
loan is a discount loan'
A. 17.77; C. 1,.2%;
B. 11.11; D. 12.%);
Discount loan !it compensating balance
. Wat is te effective rate of a 1%; discounted loan for 67 da#s" <,77"777" !it 17;
compensating balance' Assume 0)7 da#s per #ear.
A. ,7.7; C. 17.2;
B. 1%.7; D. ,,.,;
Compensating balance !it interest
. Te <remiere Compan# obtained a sort(term bank loan for <1"777"777 at an annual
interest rate 1,;. As a condition of te loan" <remiere is required to maintain a
compensating balance of <077"777 in its cecking account. Te cecking account earns
interest at an annual rate of 0;. <remiere !ould oter!ise maintain onl# <177"777 in its
cecking account for transactional purposes. <remiere>s effective interest costs of te loan
A. 1,.77; C. 1).07;
B. 12.,%; D. 1%.4);
. <erlas Compan# borro!ed from a bank an amount of <1"777"777. Te bank carged a 1,;
stated rate in an add(on arrangement" pa#able in 1, equal montl# installments.
A. ,,.1%; C. ,%.7%;
B. ,2.77; D. 1,.77;
,inancing alt!rnati(!
. A compan# as accounts pa#able of <% million !it terms of ,; discount !itin 1% da#s" net
07 da#s -,=1% net 07.. +t can borro! funds from a bank at an annual rate of 1,;" or it can
!ait until te 07t da# !en it !ill receive revenues to cover te pa#ment. +f it borro!s funds
on te last da# of te discount period in order to obtain te discount" its total cost !ill be
A. < %1"777 less C. < 7%"%77 less
B. <177"777 less D. < ,2"%77 more
. :ver# 1% da#s a compan# receives <17"777 !ort of ra! materials from its suppliers. Te
credit terms for tese purcases are ,=17" net 07" and pa#ment is made on te 07t da#
after eac deliver#. Tus" te compan# is considering a 1(#ear bank loan for <6"477 -64; of
te invoice amount.. +f te effective annual interest rate on tis loan is 1,;" !at !ill be te
net peso savings over te #ear b# borro!ing and ten taking te discount on te materials'
A. <0"),2 C. <2"477
B. <1"17) D. <1",,2
. An invoice of a <177"777 purcase as credit terms of 1=17" n=27. A bank loan for 4 percent
can be arranged at an# time. Wen sould te customer pa# te invoice'
A. <a# on te 1st. C. <a# on te 27t
B. <a# on te 17t D. <a# on te )7t
. Te <eninsula Commercial Bank and +sland Corporation agreed to te follo!ing loan proposal:
1tated interest rate of 17; on a one(#ear discounted loanC and
1%; of te loan as compensating balance on $ero(interest current account to be
maintained b# +sland Corporation !it <eninsula Commercial Bank.
Te loan requires a net proceeds of <1.% million. Wat is te principal amount of loan applied
for as part of te loan agreement'
A. <1")))"))7 C. <1"7)2"77)
B. <,"777"777 D. <1"1,%"777
. Ans!er: A
Dail# !orking capital required: ,77 8 ,%7 %7"777
Total !orking capital needed: ,4 da#s 8 %7"777 1"277"777
CCC J 14 K 07 L ,7 ,4 da#s
. Ans!er: B
Cas Conversion C#cle J Ave. collection period K +nventor# c#cle da#s L Ave. Accounts <a#able pa#ment da#s
+nventor# c#cle in da#s )7 da#s
Average collection period 2% da#s
9perating c#cle 17% da#s
Deduct Accounts pa#able pa#ment da#s 07 da#s
Cas conversion c#cle 7% da#s
. Ans!er: A
+nventor# c#cle in da#s 7% da#s
Average collection period 04 da#s
9perating c#cle 110 da#s
Deduct Accounts pa#able pa#ment da#s 07 da#s
Cas conversion c#cle 40 da#s
. Ans!er: D
+nventor# conversion period -1ee M2. %7.7 da#s
Average collection period -,/=7.1/. ,7.7 da#s
9perating c#cle 77.7 da#s
?ess: Ave. Accounts <a#able pa#ment da#s -1.%/=7.%/. 07.7 da#s
Cas conversion period 27.7 da#s
. Ans!er: D
+nventor# turnover:
Cost of goods sold=Ave. +nventor# -4/=1.%/. %.008
+nventor# conversion period -0)7 da#s=%.00. )7.% da#s
. Ans!er: A
Annual sales 0)7 da#s 8 177"777 0).7/
+nventor# turnover 0)/=%/ 7.,8
+nventor# conversion period 0)7=7., %7.7 da#s
. Ans!er: B
9ptimal cas conversion si$e J -6"77%"777 8 27 = 7.,2.N1=, J %%"777
. Ans!er: B
9T1: -, 8 <0",%1",%7 8 <,% O 7.76.N1=, J <2,"%77
9pportunit# cost: <2,"%77 O , 8 7.76 < 1"61,.%7
. Ans!er: C
*eduction in cas float -,.% K 1.%. 2.7 da#s
Additional free cas -2 da#s 8 1%7 8 <%77. <077"777
Annual savings -<077"777 8 7.77. < ,1"777
. Ans!er: C
Average A* 0"07%"777=0)7 8 07 da#s ,41",%7
Average investment: ,41",%7 8 7.)7 1)4"7%7
Carr#ing cost: 1)4"7%7 8 7.1, ,7",%7
. Ans!er: B
D19 J -.2 8 17. K -.)7 8 2%. 01 da#s
Average A*: 677"777=0)7801 da#s <77"%77
. Ans!er: D
Credit sale J 27"%77"777 8 47; J 0,"277"777
+ncreased credit sales: 0,"277"777 8 1., J 04"447"777
Ee! Average A* 04"447"777=0)7 8 27 J 2"0,7"777
9ld Average A* 0,"277"777=0)7 8 07 J ,"777"777
+ncrease in Average A* 1"),7"777
. Ans!er: C
Cange in average accounts receivables:
<lanned: ,",77"777=0)7807 140"000
<resent: ,"%77"777=0)782% 01,"%77
Decrease in A* balance 1,6"))7
Dariable cost ratio 7%;
Decrease in investment in A* 6)"47%
. Ans!er: A
Da#s> sales outstanding
9ld polic#: -.2 8 1%. K -.0 8 07. K -.0 8 27. ,7.7 da#s
Ee! polic# -.% 8 17. K -.,% 8 07. K -.,% 8 27. ,,.% da#s
. Ans!er: A
Average receivable
Ee! polic#: ,.)/=0)7 8 ,,.% 1),"%77
9ld polic#: ,.7/=0)7 8 ,7 1%7"777
+ncremental Accounts *eceivable 1,"%77
+ncremental carr#ing cost on receivable 1,"%77 8 7.7% 8 7.76 420.7%
. Ans!er: A
+ncremental sales )77"777
Dariable cost -.7% 8 )77"777. - 2%7"777.
Additional bad debts -)77"777 8 ,;. - 1,"777.
Additional carr#ing cost - 422.
Additional discounts -,")77"777 8 .% 8 70. L-,"777"777 8 .2 8 .7,. - ,0"777 .
Before ta8 increase in income 112"1%)
?ess ta8 2%"))0
+ncremental income )4"260
. Ans!er: B
:9@ J -, 8 0,"777 8 ,7 7.4.N1=, J 2"777 bags
. Ans!er: B
Eumber of orders made 27"777=177 277
Annual requirement 277 8 %"777 ,"777"777
. Ans!er: C
+nvestment in 1 package -,7 8 <077. <)"777
*equired annual return: <)"777 8 7., <1",77
. Ans!er: C
Average inventor# units 1,"777
?ess safet# units %"777
Average inventor# based on :9@ 7"777
9rder si$e 7"777 8 , 12"777
. Ans!er: D
1afet# stock1tock out Costs -1.Carr#ing Costs P
1tockout Costs
177 17%7 8 .07 8 ,7 orders J 17"%77
,77 17%7 8 .7% 8 ,7 J 2"677
077 17%7 8 .7% 8 ,7 J 17%7
277 17%7 8 .71 8 ,7 J 0%7
9ptimal safet# stock is 277(unit level !it a cost of onl# <,"0%7 cost.
. Ans!er: B
Te optimal safet# stock level represents te level tat gives te lo!est sum of stock out costs and additional
carr#ing costs. Based on te computation belo!" te lo!est combined costs is <0"027" corresponding to 077(unit
3irst compute te stockout costs based on given probabilit# of demand. 1tarting !it 177(unit level as safet# stock" if
te additional demand is ,77" te compan# as stockout of 177 units.
177: -177 8 0,Q 8 7.,%. K -,77 8 0, 8 7.0%. K -077 8 0, 8 7.,7. K -177 8 6. 2"6)7
,77: -177 8 0, 8 7.0%. K -,77 8 0, 8 7.,7. K -,77 8 6. 2",77
077: -177 8 01 8 7.,7. K -077 8 6. 0"027
277: -277 8 6. 0")77
stockout per unit 8 4 orders per #ear.
. Ans!er: A
9rdering costs 2 8 <,77 477
Carr#ing costs -%7"777 O , 8 7.7% 14"7%7
Total 16"%%7
. Ans!er: C
1avings in :8penses=additional +nvestment in +nventor# J /a8imum +nterest *ate
77"777 = -1"477"777 L 1"777"777. J 4.7%;
. Ans!er: C
Eumber of units to be purcased in advance: 67"777 L 7"%77 4,"%77
Average investments in !orking capital: 4,"%77 8 7.%Q 8 <,% 1"701",%7
9pportunit# cost 1"701",%7 8 7.1, 1,0"7%7
QTe average investment is one(alf -4,"%77 K 7. O ,
. Ans!er: C
k J -, 64. 8 -0)7 ,7 J 0).7;
Te solution assumes tat te compan# foregoes te discount onl# once during te #ear.
. Ans!er: B
Wit credit terms of ,=17" n=)7 one must pa# on te 17t da# coosing to finance te net pa#ment -invoice price minus
te cas discount. at te rate of , percent for %7 da#s" pa#ing te loan on te )7t da#. Te annuali$ed rate of foregoing
te discount is 12.6 percent.
k J ,=64 8 0)%=%7 J 12.6;
. Ans!er: B
k J 17 O -177 L 17. J 11.11;
. Ans!er: C
<rincipal ,77"777
?ess: Discount ,77"777 8 7.1% 8 67=0)7 - 7"%77.
Compensating balance - ,7"777.
Eet proceeds 17,"%77
:ffective rate: -7"%77=17,"%77. 8 0)7=67 17.2;
. Ans!er: B
+nterest e8pense 1/ 8 7.1, 1,7"777
?ess interest income on additional CA balance -,77"777 8 7.70. )"777
Eet interest cost 112"777
:ffective interest rate 112"777=-1"777"777 L ,77"777. 12.,%;
. Ans!er: A
+nterest for 1 #ear 1/ 8 1,; 1,7"777
Average <rincipal: R1/ K -1/=1,.S O , %21"))7
:stimated effective rate 1,7"777=%21"))7 ,,.1%;
Alternative solution for appro8imate effective rate:
-, 8 Eo. of pa#ments 8 +nterest. O R-1 K Eo. of pa#ments. 8 <rincipalS
-, 8 1, 8 <1,7"777. O -10 8 <1/. J ,,.1%;
. Ans!er: C
Discount %/ 8 7.7, 177"777
+nterest -%/ 8 7.64 8 7.1,. 8 1%=0)7 J ,2"%77
1avings J 7%"%77
. Ans!er: A
<urcase discount 17"777 8 7.7, 8 ,77 purcases 2"477
+nterest on borro!ed mone# 6"477 8 7.1, 1"17)
1avings 0"),2
Eumber of purcases: 0)7 da#s=1%(da# interval ,77
. Ans!er: B
Te cost of discounts missed is 1,.0; !ic is more tan te 4 percent tat te bank carges. Te compan# sould
borro! on te 17t" pa# te invoice" and finance at 4; for te ne8t 07 da#s -pa# off te bank on te 27t..
Cost of foregoing discount: -1 66. 8 -0)7 07. J 1,.01;
. Ans!erC B
Eet proceeds in pesos <1"%77"777
Divided b# net proceeds percentage 1.77 L 7.1 L 7.1% 7.7%
<rincipal amount <,"777"777