P15-10. Relaxation of credit standards
LG 4; Challenge
Additional profit contribution from sales 1,000 additional units ($40 $31) $9,000
Cost of marginal investment in AR:
Average investment, proposed plan
1 1 , 0 0 0 u n i t s $ 3 1
3 6 5
6 0
´
$56,055
1 0 , 0 0 0 u n i t s $ 3 1
´
Required return on investment 0.10
Cost of marginal investment in AR (1,784)
Cost of marginal bad debts:
The credit standards should not be relaxed since the proposed plan results in a loss.
P15-11. Initiating a cash discount
LG 5; Challenge
Additional profit contribution from sales 2,000 additional units ($45 $36)$18,000
3 0
Average investment, present plan
4 0 , 0 0 0 u n i t s $ 3 6
3 6 5
6 0
´
236,714
Reduced investment in AR $112,440
Because the net effect would be a gain of $2,784, the project should be accepted.
3 6 5
P15-12. Shortening the credit period
LG 5; Challenge
Reduction in profit contribution from sales 2,000 units ($56 $45) ($22,000)
4 5
Marginal investment in AR $22,192
Required return on investment 0.12
This proposal is not recommended.
P15-13. Lengthening the credit period
LG 5; Challenge
Preliminary calculations:
( $ 4 5 0 , 0 0 0 $ 3 4 5 , 0 0 0 ) 0 . 2 3 3 3
–=
b. Cost of marginal investment in AR:
Average investment, proposed plan
$ 5 1 0 , 0 0 0 0 . 7 6 7
3 6 5
6 0
´
$64,302
Average investment, present plan
$ 4 5 0 , 0 0 0 0 . 7 6 7
3 6 5
3 0
´
28,368
Marginal investment in AR ($35,934)
Cost of marginal investment in AR ($ 7,187)
c. Cost of marginal bad debts:
Bad debts, proposed plan (0.015 $510,000) $7,650
The net benefit of lengthening the credit period is a surplus of $3,663; therefore, the proposal is
recommended.
P15-14. Float
LG 6; Basic
a. Collection float 3 2 2.5 7.5 days
opportunity cost is above that value, the benefits of reducing float by 2 days are greater than the
cost. This makes sense intuitively. The higher is a firm’s opportunity cost, the more they will pay
to reduce float.
P15-15. Lockbox system
LG 6; Basic
a. Cash made available $3,240,000 365
($8,877/day) 3 days $26,631
P15-16. Zero-balance account
LG 6; Basic
Current average balance in disbursement account $420,000
Opportunity cost (12%) 0.12
Current opportunity cost $ 50,400
Zero-balance account
Total cost $ 48,000
The opportunity cost of the zero-balance account proposal ($48,000) is less than the current account
P15-17. Personal finance: Management of cash balance
LG 6; Intermediate
a. Alexis should transfer her current savings account balances into a liquid
marketable security
b. Current savings balance
$15,000
c. Alexis should transfer monthly the $500 from her checking account to the liquid
marketable security
Monthly transfer
Yield on marketable security @ 4.75%
$500.00
$ 23.75
d. Rather than paying bills so quickly, Alexis should pay bills on their
due dates
Average monthly bills
Total annual bills ($2,000 12)
Annual savings from slowing down payments ($591.78 0.0475)
$ 2,000
$24,000
Summary
Increase from investing current balances
$412.50
Increase in Alexis’s annual earnings $454.36
P15-18. Ethics problem
LG 6; Intermediate
Management should point out that what it is doing shows integrity, as it is honest, just, and fair. The
ethics reasoning portrayed in the Focus on Ethics box could be used.
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
– Change in contribution margin
– Change in sales discounts
Change in sales volume:
Total contribution margin of annual sales:
Under proposed plan ($15,000,000 0.20) $ 3,000,000
Investment in accounts receivable:
Turnover of accounts receivable:
Under current plan: 365 ACP 365 60 6.08
Under proposed plan: $15,000,000 (0.80) 8.69 $12,000,000 8.69 $1,380,898
Cost of marginal investment in accounts receivable:
Average investment under proposed plan $1,380,898
Cost of marginal bad debts:
Bad debt would remain unchanged as specified in the case.
Net profits from implementation of new plan:
Additional profit contribution from sales:
Gain from lower marginal investment in AR
0.12 428,313 51,398
Net impact from change in credit standards $ 76,398
Spreadsheet Exercise
The answer to Chapter 15’s Eboy Corporation accounts receivable management spreadsheet problem is available
on www.pearson.com/mylab/finance.
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 current
Funding sources must be specified as well as any seasonality to the firm’s resource investment requirements.
Providing examples of firms with great seasonal variation (i.e., a snow blower manufacturer, resort operator)
gives guidance when it comes to identifying firm seasonality. Inventory management is tackled next as the group