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10 Management of Current Assets Mayr 2014

_________, and the risk of technical
Multiple Choice insolvency would _________, respectively.
(See Table 1)
(a) increase; decrease; increase
Use Table 1 to answer questions number
Table 1
Plumster Packages, Inc.
Assets Liabilities &
Equity (b)decrease; increase; decrease
Current P10,00 Current P (c)increase; decrease; decrease
assets 0 Liabilitie 5,000 (d)decrease; increase; increase
s
Fixed assets 20,000 Long- 12,000 Answer: D
term Level of Difficulty: 3
debt Learning Goal: 2
Equity 13,000 Topic: Tradeoff between Profitability and
Total P30,00 Total P30,00 Risk
0 0
5.If the firm was to shift P7,000 of fixed
The company earns 5 percent on current assets to current assets, the firm’s net
assets and 15 percent on fixed assets. The working capital would _________, the
firm’s current liabilities cost 7 percent to annual profits on
maintain and the average annual cost of total assets would _________, and the risk
long-term funds is 20 percent. of not being able to meet current
obligations would _________, respectively.
1.The firm’s initial ratio of current to total (See Table 1)
asset is _________. (See Table 1) (a)increase; decrease; increase
(a) 1:3 (b)decrease; increase; decrease
(b) 3:1 (c)increase; decrease; decrease
(c) 2:3 (d)decrease; increase; increase
(d) 3:2 Answer: C
Answer: A Level of Difficulty: 3
Level of Difficulty: 3 Learning Goal: 2
Learning Goal: 2 Topic: Tradeoff between Profitability and
Topic: Ratio of Current to Total Assets Risk

2.The firm’s initial net working capital is 6 .If the firm was to shift P2,000 of current
(See Table 1) liabilities to long-term funds, the firm’s net
(a)–P 5,000. working capital would _________, the
(b)P13,000. annual cost of financing would _________,
(c)P 5,000. and the risk of technical insolvency would
(d)P10,000. _________, respectively. (See Table 1)
Answer: C (a)decrease; decrease; increase
Level of Difficulty: 3 (b)increase; increase; decrease
Learning Goal: 2 (c)decrease; increase; decrease
Topic: Net Working Capital (d)increase; decrease; decrease
Answer: B
3.The firm’s initial annual profits on total Level of Difficulty: 3
assets are (See Table 1) Learning Goal: 2
(a)P2,500. Topic: Tradeoff between Profitability and
(b)P3,500. Risk
(c)P3,000.
(d)P4,500. 7.The firm would like to increase its current
Answer: B ratio. This goal would be accomplished
Level of Difficulty: 3 most profitably by (See Table 14.2)
Learning Goal: 2 (a)increasing current liabilities.
Topic: Profits on Total Assets (b)decreasing current liabilities.
(c)increasing current assets.
4.If the firm was to shift P3,000 of current (d)decreasing current assets.
assets to fixed assets, the firm’s Answer: C
net working capital would _________, the Level of Difficulty: 3
annual profits on total assets would Learning Goal: 2
Topic: Managing Net Working Capital

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 (b)130
8.Net working capital is defined as (c)120
(a)a ratio measure of liquidity best used in (d)70
cross-sectional analysis. Answer: B 90+40=130
(b)the portion of the firm’s assets financed Level of Difficulty: 2
with short-term funds. Learning Goal: 2
(c)current liabilities minus current assets. Topic: Operating Cycle (Equation 14.1)
(d)current assets minus current liabilities.
Answer: D 14.A firm has an average age of inventory
Level of Difficulty: 1 of 60 days, an average collection period of
Learning Goal: 1 45 days, and an average payment period
Topic: Net Working Capital of 30 days. The firm’s cash conversion
cycle is _________ days.
9.The portion of a firm’s current assets (a)15
financed with long-term funds may be (b)45
called (c)75
(a)working capital. (d)135
(b)accounts receivable. Answer: C 60+45-30=75
(c)net working capital. Level of Difficulty: 2
(d)inventory. Learning Goal: 2
Answer: C Topic: Cash Conversion Cycle (Equation
Level of Difficulty: 1 14.2 and Equation 14.3)
Learning Goal: 1
Topic: Net Working Capital 15.A firm purchased raw materials on
account and paid for them within 30 days.
10.In working capital management, risk is The raw materials were used in
measured by the probability that a firm will manufacturing a finished good sold on
become account 100 days after the raw materials
(a)liquid. were purchased. The customer paid for the
(b)technically insolvent. finished good 60 days later. The firm’s cash
(c)unable to meet long-term obligations. conversion cycle is _________ days.
(d)less profitable. (a)10
Answer: B (b)70
Level of Difficulty: 1 (c)130
Learning Goal: 1 (d)190
Topic: Working Capital Management Answer: C
Level of Difficulty: 2
11.The conversion of current assets from Learning Goal: 2
inventory to receivables to cash provides Topic: Cash Conversion Cycle (Equation
the _________ of cash used to pay the 14.2 and Equation 14.3)
current liabilities, which represents a(n)
_________ of cash. 16.The _________ is the time period that
(a)outflow; inflow elapses from the point when the firm uses
(b)use; source the raw materials in manufacturing a
(c)source; use finished good to the point when the
(d)inflow; outflow finished good is sold.
Answer: C (a)cash turnover
Level of Difficulty: 1 (b)cash conversion cycle
Learning Goal: 1 (c)average age of inventory
Topic: Working Capital Management (d)average collection period
The goal of working capital management is Answer: C
to Level of Difficulty: 2
(a)balance current assets against current Learning Goal: 2
liabilities. Topic: Average Age of Inventory
(b)pay off short-term debts.
(c)achieve a balance between risk and 17.The _________ is the time period that
return in order to maximize the firm’s elapses from the point when the firm sells
value. a finished good on account to the point
(d)achieve a balance between short-term when the receivable is collected.
and long-term assets so that they add to (a)cash conversion cycle
the achievement of the firm’s overall goals. (b)average payment period
Answer: C (c)average age of inventory
Level of Difficulty: 1 (d)average collection period
Learning Goal: 1 Answer: D
Topic: Working Capital Management Level of Difficulty: 2
Learning Goal: 2
13.A firm has an average age of inventory Topic: Average Collection Period
of 90 days, an average collection period of
40 days, and an average payment period 18.The firm’s permanent financing
of 30 days. The firm’s operating cycle is requirement is financed with _________ in
_________ days. the aggressive financing strategy.
(a)110 (a)long-term sources

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(b)short-term sources (c)indicates that the firm is shortening its
(c)retained earnings average payment period and lengthening
(d)accounts payable its average collection period.
Answer: A (d)is easy for a manufacturing firm to
Level of Difficulty: 1 attain.
Learning Goal: 2 Answer: B
Topic: Permanent Funding Requirements Level of Difficulty: 3
Learning Goal: 2
19.Most firms employ _________ financing Topic: Managing the Cash Conversion Cycle
strategy.
(a)an aggressive 25.Disbursement float has all of the
(b)a conservative following basic components EXCEPT
(c)a trade-off (a)mail.
(d)a seasonal (b)processing.
Answer: C (c)collection.
Level of Difficulty: 1 (d)clearing
Learning Goal: 2 Answer: C
Topic: Trade-off Financing Strategy Level of Difficulty: 2
Learning Goal: 6
20.The firm’s financing requirements can Topic: Disbursement Float
be separated into
(a)current liabilities and long-term funds. 26.The costs associated with inventory can
(b)current assets and fixed assets. be divided into the following groups
(c)current liabilities and long-term debt. EXCEPT
(d)seasonal and permanent. (a)order costs.
Answer: D (b)marginal costs.
Level of Difficulty: 1 (c)carrying costs.
Learning Goal: 2 (d)total costs.
Topic: Permanent and Seasonal Funding Answer: B
Requirements Level of Difficulty: 1
Learning Goal: 3
21.The basic strategies for determining the Topic: Types of Inventory Costs
appropriate financing mix are
(a)seasonal and permanent. 27.Inventory insurance costs are an
(b)short-term and long-term. example of _________ costs.
(c)aggressive and conservative. (a)order
(d)current and fixed. (b)marginal
Answer: C (c)carrying
Level of Difficulty: 1 (d)total
Learning Goal: 2 Answer: C
Topic: Aggressive versus Conservative Level of Difficulty: 1
Financing Strategy Learning Goal: 3
Topic: Inventory Carrying Costs
22.If a firm uses an aggressive financing
strategy, 28.The economic order quantity (EOQ) is
(a)it increases return and increases risk. the order quantity which minimizes
(b)it increases return and decreases risk. (a)the order cost per order.
(c)it decreases return and increases risk. (b)the total inventory costs.
(d)it decreases return and decreases risk. (c)the carrying costs per unit per period.
Answer: A (d)order quantity in units.
Level of Difficulty: 1 Answer: B
Learning Goal: 2 Level of Difficulty: 2
Topic: Aggressive Financing Strategy Learning Goal: 3
Topic: EOQ Inventory Model
23.In economic conditions characterized by
a scarcity of short-term funds, a firm would 29.In the EOQ model, _________ costs are
best choose the _________ financing the fixed clerical cost of writing a purchase
strategy. order, processing the paper work, and
(a)aggressive verifying the invoice.
(b)conservative (a)basic
(c)permanent (b)order
(d)seasonal (c)carrying
Answer: B (d)processing
Level of Difficulty: 3 Answer: B
Learning Goal: 2 Level of Difficulty: 3
Topic: Conservative Financing Strategy Learning Goal: 3
Topic: EOQ Inventory Model
24.A negative cash conversion cycle
(a)means that the operating cycle exceeds 30. Renfro Industries balance sheet for
the average payment period. December 31, 20x3 is as follows:
(b)means that the average payment period
exceeds the operating cycle. Assets (P000) Liabilities and Equity (P000)

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Cash P8,000 Accounts Payable P36,000 34. Runners Ink, Inc. had sales last year of
Marketable P700,000 and 35 percent of its sales are
Securities 4,000 Notes Payable 12,000 for cash, with the remainder buying on
Accounts
terms of net 30 days. If the receivables
Receivable 60,000 Other Current
Liabilities 32,000 conversion period is actually 38 days, what
Inventories100,000 Long-term debt 80,000 is Runners Ink's accounts receivable?
Plant & a. P72,877
Equip. 220,000 Preferred Stock 48,000 b. P25,507
Deprec. 64,000 Common Stock 20,000 c. P47,370
Net Plant d. none of the above
& Equip. 156,000 Paid-in Surplus 40,000 Answer: c
Retained Earnings60,000
Topic: Operating cycle analysis
Total
Assets P328,000 Total liab&EquiyP328,000
Solution: AR = 38[(P700,000)
(0.65)]/365) = P47,370
What is Renfro's net working capital at the
end of 20x3? 35. Tocor is considering the
a. -P 8 million implementation of a lockbox collection
b. P36 million system for its mid-western and western
c. P92 million sales regions. Sales in those two regions
d. P172 million are 30 percent of Tocor's annual sales of
Answer: c P560 million. The lockbox system will cost
Topic: Net working capital calculation P187,000 a year and reduce collection time
Solution: Net W.C. = P8,000 + by 3 days. If Tocor could invest any
P4,000 + P60,000 + P100,000 - P36,000 released funds at 10.85 percent, should it
- P12,000 - P32,000 = P92,000(000) use the lockbox system? Assume 365 days
per year.
31. What is the inventory conversion a. Yes, savings of P149,819
period for O’Brian's if it has sales of b. Yes, savings of P312,397
P320,000, an average inventory of P5,333, c. No, loss of P37,181
and a cash conversion cycle of 20 days? d. No, loss of P35,100
Assume that the cost of sales is 55 percent Answer: c
of sales. Topic: Lockbox
a. 6 days Solution: Net benefits of lockbox =
b. 11 days (P560,000,000/365)(0.3)(3)(0.1085) -
c. 13.5 days P187,000 = -P37,181
d. 15 days
Answer: b 36. Mace Auto Parts Company sells to retail
Topic: Operating cycle analysis auto supply stores on credit terms of "net
Solution: Inv. Conv. Pd. = P5,333/ 60". Annual credit sales are P300 million
(P176,000/365) = 11.06 or 11 days (spread evenly throughout the year) and
its accounts average 28 days overdue. The
32. Tefft Industries has an average firm's variable cost ratio is 0.75 (i.e.,
inventory of P170,000, sells on terms of variable costs are 75 percent of sales).
2/10, net 30, and its cost of sales is When converting from annual to daily data
P540,000. What is Tefft's inventory or vice versa, assume there are 365 days
conversion period? per year. Determine Mace's average
a. 85 days investment in receivables.
b. 115 days a. P 821,918
c. 105 days b. P 3,409,091
d. cannot be determined from the data c. P72,328,767
given d. P54,246,575
Answer: b Answer: d
Topic: Operating cycle analysis Topic: Receivables investment
Solution: ICP = P170,000/ Solution: Average Investment in
(P540,000/365) = 114.9 or 115 days Receivables = P300,000,000x75% x 88 /
365 = P54,246,575
33. If Swatch's inventory conversion period
is 45 days, its payables deferral period is 37. Mace Auto Parts Company sells to retail
35 days, and its receivables conversion auto supply stores on credit terms of "net
period is 50 days, then its cash conversion 60". Annual credit sales are P300 million
cycle must be ______ days. (spread evenly throughout the year) and
a. 60 its accounts average 28 days overdue. The
b. 90 firm's variable cost ratio is 0.75 (i.e.
c. 30 variable costs are 75 percent of sales).
d. cannot be determined from information When converting from annual to daily data
given or vice versa, assume there are 365 days
Answer: a per year. Suppose that Mace's sales are
Topic: Operating cycle analysis expected to increase by 20 percent next
Solution: CCC = 45 + 50 - 35 = 60 year and, through more effective collection
days methods, the firm is able to reduce its
average collection period by 20 days.
Determine the firm's average investment in

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receivables for next year under these
conditions.
a. P67,068,493
b. P56,666,667
c. P5,294,118
d. P50,301,370
Answer: d investment is 16 percent. Determine the
Topic: Receivables investment
Solution: Average investment in
receivables = P360,000,000x75% /365 x
68 = P50,301,370
38. Warren Motor Company sells P30
million of its products to wholesalers on
terms of "net 30." Currently, the firm's
average collection period is 48 days. In an
effort to speed up the collection of
receivables, Warren is considering offering
a cash discount of 2 percent if customers
pay their bills within 10 days. The firm
expects 50 percent of it's customers to
take the discount and it's average
collection period to decline to 30 days. The
firm's required pretax return (i.e.
opportunity cost) on receivables
investment is 16 percent. Determine the
cost of the cash discounts to Warren.
a. P300,000
b. P 60,000
c. P 40,000
d. P 48,000
Answer: a profit contribution ratio 0.20. Bluegrass
Topic: Cost of cash discounts
Solution: Cost of cash discounts =
P30,000,000 x 0.50 x 0.02 = P300,000
39. Warren Motor Company sells P30
million of its products to wholesalers on
terms of "net 30." Currently, the firm's
average collection period is 48 days. In an
effort to speed up the collection of
receivables, Warren is considering offering
a cash discount of 2 percent if customers
pay their bills within 10 days. The firm
expects 50 percent of it's customers to
take the discount and it's average
collection period to decline to 30 days. The
firm's required pretax return (i.e.
opportunity cost) on receivables
investment is 16 percent. Determine
Warren's pretax earnings on the funds
released from the reduction in receivables.
(Assume a 365 day year)
a. P1,479,452
b. P236,712
c. P266,667
d. none of the above
Answer: b Determine Whirlewind’s average
Topic: Credit terms analysis
Solution: Reduction in A/R =
P30,000,000/365 x 48 - P30,000,000/365
x 30 = P1,479,452
Earnings on Released
Funds = P1,479,452 x 0.16 = P236,712
40. Warren Motor Company sells P30
million of its products to wholesalers on
terms of "net 30." Currently, the firm's
average collection period is 48 days. In an
effort to speed up the collection of
receivables, Warren is considering offering
a cash discount of 2 percent if customers
5
pay their bills within 10 days. The firm
expects 50 percent of it's customers to
take the discount and it's average
collection period to decline to 30 days. The
firm's required pretax return (i.e.
opportunity cost) on receivables
net effect on Warren's pretax profits of
offering a 2 percent cash discount.
a. P 300,000
b. P236,712
c. -P63,288
d. none of the above
Answer: c
Topic: Credit terms analysis
Solution: See problems 37 and 38
for intervening calculations
Net Change in Pretax
Profits = P236,712 - P300,000 = -P63,288
41. Bluegrass Distilleries, Inc. refuses to
extend credit to any wholesale distributors
who have a history of being delinquent in
repaying credit extended to them. This
policy results in lost sales of P10 million
annually. Based on past experience with
these types of customers, the firm
estimates that the average collection
period would be 90 days and that the bad-
debt loss ratio would be 6 percent. The
firm's variable cost ratio is 0.80, making its
Distilleries' required pretax return (i.e.,
opportunity cost) on receivables
investments is 20 percent. When
converting from annual to daily or vice
versa, assume there are 365 days per
year. If Bluegrass Distilleries extends
credit to these (previously delinquent)
customers, determine the increase in the
investment in receivables.
a. P27,397
b. P1,972,603
c. P111,111
d. P125,000
Answer: b
Topic: Credit terms
Solution: Additional receivables
investment = P10,000,000x80%/365 x 90
= P1,972,603
42. Whirlewind Company sells to retail
appliance stores on credit terms of net 30.
Annual credit sales are P182,500,000
spread evenly throughout the year and its
accounts average 20 days overdue. The
firm’s variable cost ratio is 0.70.
investment in receivables. (Assume 365
days per year an all calculations.)
a. P17,500,000
b. P25,000,000
c. P15,000,000
d. none of the above/cannot be computed
Answer: a
Topic: Receivables investment calculation
Solution: Average collection period =
30 + 20 = 50 days
Average investment in receivables =
(P182,500,000x70%)/365) x 50
= P17,500,000
43. Gates Industries balance sheet and 45. Dupree Funds is considering the fees
income statement for the year ending charges by two banks. First America
December 31, 1978 are as follows: charges a flat rate of P0.11 per payment
and First Western requires a minimum
Balance Sheet (P million) compensating balance of P500,000, plus
P0.05 per payment. What is the number of
Cash P10.0 Accounts payable P15.0 payments per year where the costs of the
Accounts
two banks will be equal? Assume Dupree’s
receivable 15.0 Salaries, benefits,
& payroll costs of funds is 9%.
taxes payable 3.0 a. 281,250
Inventories* 12.0 Long-term debt 15.0 b. 750,000
Fixed assets c. 900,000
(net) 30.0 Stockholders' d. 409,091
equity 34.0 Answer: b
Total assets P67.0 Total liab. & stock. Topic: Bank service fee analysis
equity P67.0
Solution: x(.11) = 500,000(.09) +
Income Statement (P million)
x(.05) x = 750,000

Net sales (all credit) P125.0 Problems

Cost of sales 75.0
Selling, general, & adm. expenses 30.0 1.Chubby Co. is a producer of honeycured
Other expenses 13.0 ham, has a annual sales of P10,000,000, a
Earnings after tax P 7.0 cost of goods sold of 75% of sales, and
purchases are 65% of cost of goods sold.
*Note: Average inventories also equal P12.0
(million).
Chubby has an average age of inventory of
60 days (AAI), and an average collection
Determine the length of the firm's cash period (ACP)of 40 days, its average
conversion cycle. payment period (APP) is 35 days.
a. 102.2 days What is Its Operating cycle?
b. 29.2 days What is its Cash Conversion Cycle?
c. 39.6 days What is the amount of resources invested
d. none of the above/cannot be computed in its cash conversion cycle?
Answer: c Answer:
Topic: Cash conversion cycle a. 60+40 = 100 OC
Solution: Inventory conversion b. 60+40-35= 65 CCC
period = P12.0/(P75.0/365) = 58.4 days c. P1,861,301
Receivables conversion period = P15.0/ +Inventory 10,000,000X75%X60/365=
(P125.0/365) = 43.8 days
Operating cycle = 58.4 + 43.8 = 102.2 1,232,877
days +Accounts Receivable
Payables deferral period = (P15.0 + P3.0)/ 10,000,000X40/365
[(P75.0 + P30.0)/365]
= 62.6 days 1,095,890
Cash conversion cycle = 102.2 - 62.6 = - Accounts Payable
39.6 days 10,000,000X75%X65%X35/365

44. Tritonic is considering switching from 467,466

depository transfer checks to using wire
transfers for sending funds from its local
banks to its bank in Chicago. The cost of
the wire transfer is P5.25 more than the
cost of depository transfer checks. The
change would reduce the total float by 3
days. Tritonic can earn 8.5% on the funds
released through the more efficient
transfer. If Tritonic has 30 local banks,
what annual sales level would the firm
require before the change to wire transfers
would be profitable? Assume there are 250
business days each year.
a. P391,544,118
b. P 56,360,294
c. P 84,286,029
d. none of the above
Answer: b firm’s annual savings if the operating cycle
Topic: Wire transfer analysis
Solution: Costs = P5.25(30)(250) =
P39,375 Sales level = P39,375 (365) =
P56,360,294
Resources invested
1,861,301
2.Minny Fishing Products is analyzing the
performance of its cash management. On
the average, the firm holds inventory 65
days, pays its suppliers in 35 days, and
collects its receivables in 15 days. The firm
has a current annual outlay of P1,960,000
on operating cycle investments. Minny
currently pays 10 percent for its negotiated
financing. (Assume a 360 day year.)
(a)Calculate the firm’s cash conversion
cycle.
(b)Calculate the firm’s operating cycle.
(c)Calculate the daily expenditure and the
is reduced by 15 days.
Answers:
(a) CCC = 65 = 15 – 35 = 45
(b) OC = 65 + 15 = 80
(c) Daily expenditure =
P1,960,000/360 = P5,444.44

6
Annual savings = P5,444.44  15  0.10 = assets and fixed assets for the months of
P8,167 January through December are given in the
following table.
3.A firm has arranged for a lockbox system
to reduce collection time of accounts Month Current Fixed Total
receivable. Currently the firm has an Assets Assets Assets
average collection period of 43 days, an January P60,000 P70,000 P130,000
average age of inventory of 50 days, and February 58,000 70,000 128,000
an average payment period of 10 days. March 55,000 70,000 125,000
The lockbox system will reduce the April 47,000 70,000 117,000
average collection period by three days by May 40,000 70,000 110,000
reducing processing, mail, and clearing June 41,000 70,000 111,000
float. The firm has total annual outlays of July 40,000 70,000 110,000
P15,000,000 and currently pays 9 percent August 37,000 70,000 107,000
for its negotiated financing.
September 38,000 70,000 108,000
(a) Calculate the cash conversion cycle
October 33,000 70,000 103,000
before and after the lockbox system.
November 40,000 70,000 110,000
(b) Calculate the savings in financing
December 50,000 70,000 120,000
costs from the lockbox system.
Answers:
(a)CCC before lockbox = 43 + 50 – 10 = (a)Find the average monthly seasonal and
83 permanent funds requirement.
CCC after lockbox =40 + 50 – 10 = 80 (b)What is the total cost of financing under
(b)P15,000,000/360 = P41,666.67 per day the aggressive and conservative strategies.
 3  0.09 = P11,250 Assume short-term funds costs 4.5 percent
and the interest rate for long-term funds is
12 percent.
4.Tim’s Sons Company is interested in (c)Find the net working capital under the
making sure they have enough money to aggressive and conservative strategies.
finance their assets. The company’s current
Answers: management assuming the firm’s
Total Permanent Seasonal opportunity cost is 12 percent?
Assets Requireme Requirement Answers:
nt Additional benefit from P21,600
P130,000 P103,000 P27,000 reduced required cash
128,000 P103,000 25,000 Reduction in
125,000 P103,000 22,000 administrative costs P24,000
117,000 P103,000 14,000 P2,000  12
110,000 P103,000 7,000  Total Benefit
111,000 P103,000 8,000 P45,600
110,000 P103,000 7,000 Less: Cost (Bank’s fee)
107,000 P103,000 4,000 P35,000
108,000 P103,000 5,000  Additional benefit
103,000 P103,000 0
P10,600
110,000 P103,000 7,000
Since benefits (P45,600) are greater than
120,000 P103,000 17,000
costs (P35,000), the firm should accept the
P143,000
proposed cash management.
(a)Monthly permanent requirement =
P103,000
6.Krug Gold Coin, Inc. is considering
Average seasonal requirement =
shortening its credit period from 30 days to
143,000/12 =P11,916.67
20 days and believes, as a result of this
(b)Aggressive:
change, its average collection period will
Total costs =P11,916.67  0.045 =103,000
decrease from 36 days to 30 days. Bad
 0.12 = P12,896.25
debt expenses are also expected to
Conservative:
decrease from 1.2 percent to 0.8 percent
Total costs = 103,000  0.12 = P15,600
of sales. The firm is currently selling
(c)Net Working Capital:
300,000 units but believes as a result of
Aggressive Strategy: P33,000
the change, sales will decline to 275,000
Conservative Strategy: P60,000
units. On 300,000 units, sales revenue is
P4,200,000, variable costs total
5.Don’s Sons Company has been offered
P3,300,000, and fixed costs are P300,000.
by its bank to manage its cash at a cost of
The firm has a required return on similar-
P35,000 per year. Under the proposed cash
risk investments of 15 percent. Evaluate
management, the firm can reduce the cash
this proposed change and make a
required on hand by P180,000. Since the
recommendation to the firm.
bank is also doing a lot of record keeping,
Answer: 300,000 – 275,000 =
the firm’s administrative cost would
25,000 units decline in sales
decrease by P2,000 per month. What
Price = 4,200,000/300,000 =
recommendation would you give the firm
P14
with respect to the proposed cash
Variable cost per unit = v P
3,300,000/300,000 = P11

7
 Reduction in profit contribution
from decline in sales
= (300,000 – 275,000 units)(14 –
11) –P75,000
Cost of marginal investment in
A/R:
Turnover of A/R with proposed plan
360/30 = 12
Average investment with proposed
(275,000)(11)
 $252,083
plan 12
Turnover of A/R with present plan
= 360/36 = 10
Average investment with proposed
(300,000)(11)
 $330,000
plan 10
Marginal investment in A/R =P
77,917
Reduction in cost of marginal
investment in A/R = 77,917 (0.15) =
P11,687
Reduction in marginal bad debts:
Bad debts with proposed plan
=(0.012)(4,200,000) = P50,400
Bad debts with present plan
=(0.008)(275,000)(14) = P30,800
Net loss from implementation of
proposed plan = -P19,600
Do not recommend.
–P43,713
7.Contex, Inc. uses 800 units of a product
per year on a continuous basis. The
product has carrying costs of P50 per unit
per year and order costs of P300 per order.
It takes 30 days to receive a shipment
after an order is placed and the firm
requires a safety stock of 5 days usage in
inventory.
(a)Calculate the economic order quantity
(EOQ).
(b) Determine the reorder point.
Answers:
(a)EOQ =
(2  800  $300)/50
= 98 units
(b) Reorder point = [30 days 
(800/360)] +[5  (800/360)] = 66.7 +
11.11 = 77.81 – 78 units
Level of Difficulty: 3
Learning Goal: 3
Topic: EOQ Inventory Model and Inventory
Reorder Point (Equation 14.7 and Equation
14.8)
8.Sharon’s Apple Farm uses 12,600
baskets a year for apple shipment.
Determine the optimum order quantity of
baskets assuming the order costs per order
is P600 and it costs P2 to carry a unit of
basket in inventory per period.
Answer: EOQ =
(2  12, 600  $600)/2 = 2,750 units
Level of Difficulty: 3
Learning Goal: 3
Topic: EOQ Inventory Model (Equation
14.7)
9.Sharon uses 35 baskets each day to pack
apples for shipping. It takes 5 days to
receive a shipment of baskets after an
order is placed and she would like a safety
stock of 3 days in inventory. At what level
of inventory should Sharon place an order
for baskets?
Answer: Reorder point = 5  35 + 3
 35 = 280 units
Level of Difficulty: 3
Learning Goal: 3
Topic: Inventory Reorder Point (Equation
14.8)
10.Data products, Inc., uses 2,400 units of
a product per year on a continuous basis.
The product carrying costs are P60 per
year and ordering costs are P250 per
order. It takes 20 days to receive a
shipment after an order is placed and the
firm requires a safety stock of 8 days of
usage in inventory.
(a)Calculate the economic order quantity
(round up to the nearest whole unit).
(b)Calculate the total cost per year to
order and carry this item.
(c)Their supplier has notified the company
that if they increase their order quantity by
58 units they will give the company a
discount. Calculate the peso discount that
the company will have to give
Dataproducts to result in a net benefit to
the company.
Answers:
(a)EOQ =
(2  2, 400  250)/60 = 142
units
(b)Total cost = (2,400/142)(P250) +
(142/2)(P60) = P8,485
(c)Total cost at new level = (2,400/200)
(P250) + (200/2)(P60) = P9,000
The yearly discount will have to be at least
P515 (P9,000–P8,485) to make the
decision neutral; over P515 to result in a
net benefit to the company.