Solutions to Problems 
P15-1. CCC
LG 2; Basic
a. OC Average age of inventories Average collection period
b. CCC Operating cycle Average payment period
c. To calculate the amount of resources needed, you must calculate the amount of inventory,
receivables, and accounts payable.
For the inventory balance: $20 million × (80 365) = $4.4 million⁄
d. Shortening either the AAI or the ACP, lengthening the APP, or a combination of these can reduce
the CCC.
P15-2. Changing CCC
LG 2; Intermediate
a. AAI 365 days 5 times inventory 73 days
133 days 35 days 98 days
b. The inventory balance equals cost of goods sold divided by inventory turnover:
c. The change in working capital is driven entirely by the reduction in inventory because neither the
million.
P15-3. Multiple changes in CCC
LG 2; Intermediate
a. AAI 365 6 times inventory 61 days
OC AAI ACP
Daily financing $3,000,000 365
$8,219
Resources needed Daily financing CCC
Resources needed $8,219 51
$419,169
c. Additional profit (daily expenditure reduction in CCC) financing rate
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
February 2,000,000 2,000,000 0
December 3,000,000 2,000,000 1,000,000
Average permanent requirement $2,000,000
b. (1) Under an aggressive strategy, the firm would borrow from $1,000,000 to
$12,000,000 according to the seasonal requirement schedule shown in part a at the prevailing
c. Aggressive ($2,000,000 0.10) ($4,000,000 0.05) $200,000 $200,000
$400,000
Note that under the aggressive approach, there are no surplus balances.
ConservativeUnder the conservative approach, the firm borrows $14,000,000 because that is
d. The aggressive approach is less costly for two reasons. First, some of the money that the firm
borrows costs 5% rather than 10%, whereas in the conservative approach the firm pays 10% on all
of its debt. Second, under the aggressive approach, the firm borrows less in total over the year.
P15-5. EOQ analysis
LG 3: Intermediate
a. (1) EOQ
(2
´
S
´
O)
C = (2
´
1,400,000
´
$55)
$2.70 = 7,552
(2
´
1,400,000
´
1)
b. When the fixed order cost is very low, it makes sense to place more orders, with each order being
P15-6. EOQ, reorder point, and safety stock
LG 3; Intermediate
a. EOQ
( 2 O ) ( 2 8 0 0 $ 5 0 )
= = 2 0 0 u n i t s
C 2
S
´ ´ ´ ´
2 0 0 u n i t s 8 0 0 u n i t s 1 0 d a y s
2 3 6 5
´
c. Reorder point
( 8 0 0 u n i t s 1 0 d a y s ) ( 8 0 0 u n i t s 5 d a y s ) 3 2 . 8 8 u n i t s
3 6 5 d a y s 3 6 5 d a y s
´ ´
+ =
d. Change Do Not Change
(2) carrying costs (1) ordering costs—unaffected by how soon one orders
(3) total inventory cost (5) EOQ—a function of cost from reorder point to order
size
(4) reorder point
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)
Ownership period in years
Depreciation over 5 years
Cost per gallon of gasoline over the 5-year ownership period
$30,260
3.7
5
17,337
3.15
44,320
5.7
5
25,531
3.15
Total fuel cost for each vehicle over 5-year ownership period $12,434 $16,875
If Jimmy decides to buy the V-8, he will have to pay
$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.
Marginal cost
$11,889
* Accumulated Finance Charges V-6 V-8
Cost of SUV
Assumed annual discount rate
Term of the loan (years)
PV inters factor of the annuity (PVIFA)
$30,260.00
5.50%
5
4.2703
$ 44,320
5.5%
5
4.2703
over the entire 5-year period $ 5,171 $ 7,573
e. The true marginal cost of $16,330 is greater than the simple difference between the costs of the two
vehicles.
P15-8. Accounts receivable changes without bad debts
LG 4; Intermediate
a. Current units $360,000,000 $60 6,000,000 units
$6,000,000
b. Average investment in accounts receivable
Turnover, present plan
3 6 5 6 . 0 8
6 0
=
Turnover, proposed plan
3 6 5 3 6 5 5 . 0 7
( 6 0 1 . 2 ) 7 2
= =
´
Marginal investment in AR:
Average investment, proposed plan:
*
( 7 , 2 0 0 , 0 0 0 u n i t s $ 5 5 )
5 . 0 7
´
$78,106,509
Average investment, present plan:
( 6 , 0 0 0 , 0 0 0 u n i t s $ 5 5 )
6 . 0 8
´
54,276,316
*Total units, proposed plan existing sales of 6,000,000 units 1,200,000 additional units.
c. Cost of marginal investment in accounts receivable:
Marginal investment in AR $23,830,193
d. The additional profitability of $6,000,000 exceeds the additional costs of $3,336,227. However,
P15-9. Accounts receivable changes and bad debts
LG 4; Challenge
a. Bad debts
Proposed plan (60,000   $20 0.04) $48,000
c. No, because the cost of marginal bad debts exceeds the savings of $3,500.
d. Additional profit contribution from sales:
Net benefit from implementing proposed plan $25,500
This policy change is recommended because the increase in sales and the savings of $3,500 exceed
the increased bad debt expense.
e. When the additional sales are ignored, the proposed policy is rejected. However, when all the