P15-3. Multiple changes in CCC
LG 2; Intermediate
a. AAI 365 6 times inventory 61 days
b. OC 56 days 35 days
c. Additional profit (daily expenditure reduction in CCC) financing rate
d. Reject the proposed techniques because costs ($35,000) exceed savings ($26,712).
P15-4. Aggressive versus conservative seasonal funding strategy
LG 2; Intermediate
a.
Month
Total Funds
Requirements
Permanent
Requirements
Seasonal
Requirements
January $2,000,000 $2,000,000 $ 0
b. (1) Under an aggressive strategy, the firm would borrow from $1,000,000 to $12,000,000 according
(2) Under a conservative strategy, the firm would borrow at the peak need level of $14,000,000 at
c. Aggressive ($2,000,000 0.10) ($4,000,000 0.05) $200,000 $200,000
d. The aggressive approach is less costly for two reasons. First, some of the money that the firm
P15-5. EOQ analysis
LG 3: Intermediate
a. (1) EOQ
(2 ) (2 1,200,000 $25)
= = 10,541
$0.54
S O
C
´ ´ ´ ´
(2) EOQ
(2 1,200,000 0) 0
$0.54
´ ´ =
(3) EOQ √ [(2 × 1,200,000 × $25) / $0.01] = 77,460
EOQ approaches infinity. This suggests the firm should carry the large inventory to minimize
ordering costs.
b. When the fixed order cost is zero, it makes sense to place more orders, with each order being smaller
P15-6. EOQ, reorder point, and safety stock
LG 3; Intermediate
a. EOQ
(2 O) (2 800 $50)
= = 200 units
C 2
S´ ´ ´ ´
200 units 800 units 10 days
2 365
´
+
c. Reorder point
(800 units 10 days) (800 units 5 days) 32.88 units
365 days 365 days
´ ´
+ =
d. Change Do Not Change
P15-7. Personal finance: Marginal costs
LG 3; Challenge
Jimmy Johnson
Marginal Cost Analysis
Purchase of V-8 SUV vs. V-6 SUV
V-6 V-8
MSRP
Engine (liters)
$30,260
3.7
44,320
5.7
$4,441 more on fuel for the V-8 SUV. The total
marginal costs over the 5-year period, associated with
purchasing the V-8 over the V-6, are $16,330.
* Accumulated Finance Charges V-6 V-8
Cost of SUV
$30,260.00
$ 44,320
P15-8. Accounts receivable changes without bad debts
LG 4; Intermediate
a. Current units $360,000,000 $60 6,000,000 units
b. Average investment in accounts receivable
total variable cost of annual sales
turnover of A/R
Turnover, present plan
365 6.08
60 =
Turnover, proposed plan
365 365 5.07
(60 1.2) 72
= =
´
Marginal investment in AR:
Average investment, proposed plan:
*
(7,200,000 units $55)
5.07
´
$78,106,509
Average investment, present plan:
(6,000,000 units $55)
6.08
´
54,276,316
Marginal investment in AR $23,830,193
*Total units, proposed plan existing sales of 6,000,000 units 1,200,000 additional units.
c. Cost of marginal investment in accounts receivable:
d. The additional profitability of $6,000,000 exceeds the additional costs of $3,336,227. However, one
P15-9. Accounts receivable changes and bad debts
LG 4; Challenge
e. When the additional sales are ignored, the proposed policy is rejected. However, when all the benefits
P15-10. Relaxation of credit standards
LG 4; Challenge
Additional profit contribution from sales 1,000 additional units ($40 $31) $9,000
P15-11. Initiating a cash discount
LG 5; Challenge
P15-12. Shortening the credit period
LG 5; Challenge
Reduction in profit contribution from sales 2,000 units ($56 $45) ($22,000)
P15-13. Lengthening the credit period
LG 5; Challenge
Preliminary calculations:
c. Cost of marginal bad debts:
Bad debts, present plan (0.01 $450,000) 4,500
Cost of marginal bad debts (3,150)
P15-14. Float
LG 6; Basic
a. Collection float 2 2 2.5 6.5 days
b. Opportunity cost $65,000 3.0 0..09 $17,550
P15-15. Lockbox system
LG 6; Basic
a. Cash made available $3,240,000 365
P15-16. Zero-balance account
LG 6; Basic
Zero-balance account
P15-17. Personal finance: Management of cash balance
LG 6; Intermediate
a. Alexis should transfer her current savings account balances into a liquid
Yield on marketable security @ 4.75%
$712.50
c. Alexis should transfer monthly the $500 from her checking account to the liquid
d. Rather than paying bills so quickly, Alexis should pay bills on their
P15-18. Ethics problem
LG 6; Intermediate
Case
Case studies are available on www.myfinancelab.com.
Assessing Roche Publishing Company’s Cash Management Efficiency
Chapter 15’s case involves the evaluation of a furniture manufacturer’s cash management by its treasurer. The student
must calculate the OC, CCC, and resources needed and compare them to industry standards. The cost of the firm’s
current operating inefficiencies is determined and the case also looks at the decision to relax its credit standards.
Finally, all the variables are consolidated and a recommendation made. To determine the net profit or loss from the
change in credit standards we must evaluate the four factors that are impacted:
Investment in accounts receivable:
Turnover of accounts receivable:
Average investment in accounts receivable:
Cost of marginal investment in accounts receivable:
Cost of marginal bad debts:
Net profits from implementation of new plan:
Cost of marginal investment in AR:
Spreadsheet Exercise
The answer to Chapter 15’s Eboy Corporation accounts receivable management spreadsheet problem is located on
the Instructor’s Resource Center at www.pearsonhighered.com/irc under the Instructor’s Manual.
Group Exercise
Group exercises are available on www.myfinancelab.com.
The focus of financial management evolves from long-term investment decisions to short-term cash management
in this chapter. This assignment will require the groups to establish proper controls to better manage its current
assets and liabilities. This process begins with the development of the fictitious firm’s operating cycle. This is
based on its AAI and ACP.