Fresh & Fruity Foods, Inc. Case 8
Current-Asset Management
Purpose: The student must focus on accounts receivable as an investment (use of funds) and the financial
advantages of reducing the commitment to this asset. At the same time the firm is also considering
reductions to its accounts payable balance in order to take cash discounts. This alternative will call for
additional bank financing, and comparative costs must be carefully assessed. The case utilizes many
calculations that are covered in the text, but places them in a more complex, decision oriented framework.
Relation to Text: The case should follow the completion of Part Three (Working Capital) in the text. It
primarily relies on material from chapters 7 and 8.
Complexity: The case is moderately complex. It should require 1-1½ hours.
Solutions
1. Average collection period = accounts receivable / average daily credit sales
Accounts receivable = $209,686
4. Accounts payable = average payment period x purchases per day
Average payment period = 10 days
Purchases per day = [969,000 – (.02 × 969,000)] / 360
This is the size of the bank loan required to take all cash discounts in 10 days.
5. The cost is the 8 percent interest on the bank loan of $49,367 or $3,949. The gain is the cash
6. First determine the amount of funds on which interest must be paid.
a) Note: Alert students may point out that Fresh & Fruity still needs $49,367 in cash no matter what
kind of loan it is. Therefore, if the interest is to be charged on a discounted basis, and a
compensating balance is required, Fresh & Fruity must borrow a larger amount to make up for it.
Solve for the larger amount using algebra where L is the loan amount.
Effective rate = $5,485 = 11.1%
$49,367
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