8. (A) Decrease in annual sales
= Present annual sales
x Percent reduction
Decrease in pro t contribution
= Decrease in sales
x Pro t contribution ratio
(B) Decrease in average receivables balance
= Present average balance
– New average balance
= Present annual sales/365
x Present average collection period
– New annual sales/365
x New average collection period
Earnings on the funds released by the
decrease in receivables
= Decrease in receivables
x Required pre-tax rate of return
(C) Decrease in bad-debt loss
= Present bad-debt loss
– New bad-debt loss
= Present bad-debt loss ratio
x Present annual sales
– New bad-debt loss ratio
(D) Decrease in inventories $250,000
Earnings on the funds released by the
decrease in inventories = Decrease
in inventories x required pre-tax rate
(E) Net change in pre-tax pro ts
= Marginal returns – Marginal costs
= ((B) + (C) + (D)) – (A)
9. Days Past-Due Accounts Receivable Percent
Current $6,463 56.6%
1 – 30 1,398 12.2
10. (A) Additional collection expenditures = $20,000
(B) Decrease in average receivables balance
= Present average balance
– New average balance
= Annual sales/365
x Present average collection period
– Annual sales/365
x New average collection period
Earnings on the funds released by the
decrease in receivables investment
= Decrease in receivables investments
x Required rate of return
(C) Decrease in bad-debt loss
= Present bad-debt loss
– New bad-debt loss
= (Present bad-debt loss ratio
– New bad-debt loss ratio) x Annual sales
(D) Net change in pre-tax pro ts
= Marginal returns – Marginal costs
= ((B) + (C)) – (A)
11. Reduction in receivables balance:
Return on reduction in receivables balance:
Cost of discount:
12. Current receivables investment:
New receivables investment:
Cost of additional receivables investment:
Cost of additional inventory investment
Change in bad debt losses:
Cost of cash discount:
Pro t on additional sales:
Net bene t:
13. a. i. If Websters can return to pro tability in 2017, it could become a
b. i. Company averages 30 days overdue on its payments to two
ii. Financial ratios (measures of liquidity, pro tability, and
Ratio Industry Average 2014 2015 2016
C/A÷C/L 2.82 1.55 1.60 1.41
c. i. Forecasted balance sheet, income statement, and cash budget for
ii. Additional information about the status of its payments to other
iii. Reasons why sales decreased in 2016, compared to 2015.
14. Reduction in pro t contribution = $1 million sales reduction x 0.3
Reduction in accounts receivable = [($10 million/365) x 72]
Earnings on released funds = $863,014 x .25
Earnings on released funds = $200,000 x 0.25
Net change in pretax pro ts = $215,754 + $50,000 + $230,000
15. (A) Decrease in annual sales = Present annual sales x Percent reduction
Decrease in pro t contribution = Decrease in sales x Pro t contribution
ratio
(B) Decrease in average receivables balance = Present average balance
–
New average balance
= ($43,800,000/365) x 68
Earnings on funds released = Decrease in receivables x Required pretax
rate of return
(C) Decrease in bad-debt loss = Present bad-debt loss – New bad-debt
loss
(D) Earnings on funds released
from inventories = Decrease in inventories x Required pretax
rate of return
(E) Net Change in Pretax Profits = Marginal returns – Marginal
costs = (B) + (C) + (D) – (A)
16. a. S = $20; D = 1,920,000 units; C = .15 x 800 10,000
= $0.0120/unit
Alternative solution:
b. TC = (D x S)/Q* + (Q* x C)/2 = (1,920,000 x $20)/80,000 + (80,000
(Orders should be placed about every 15 days)
17. a. S = $41.25; D = 110,000 reams; C = 0.15 x $2.00 = $0.30/ream
b. TC = (D x S)/Q* + (Q* x C)/2 = (110,000 x $41.25)/5500
(Orders should be placed every 18.25 days)
d. Total Inventory
Order Ordering Carrying Costs
Quantity Costs Costs Ordering Costs +
4,000 1134.38 600.00 1734.38
5,000 907.50 750.00 1657.50
The economic order quantity (Q*) as shown in the table is 5500—the
same value as obtained algebraically in part (a).
18. a. Financial management text Managerial economics text
S = $2,500 S = $2,000
b. TC = (D/Q x S) + (Q/2 x C) TC = (D/Q x S) + (Q/2 x C)
c. T* = (365 x Q*)/D T* = (365 x Q*)/D
19. a. Q* = 20,000
D = 120,000
b. Average inventory = Q*/2 = 20,000/2 = 10,000 units
Annual carrying costs = Q*/2 x C
20. a. D = 250,000; S = $98; C = 0.16 x $3.0625 = $0.49
21. a. Q* = 30,000; D = 150,000; C = $0.15 x $2 = $0.30; n
= 20
b. Average inventory = Q*/2 = 30,000/2 = 15,000 copies
b. Average inventory = (Q*/2) + Safety stock = (30,000/2) + 24,658