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CHAPTER 20
CREDIT AND INVENTORY
MANAGEMENT
Answers to Concepts Review and Critical Thinking Questions
4. 1. Character: determines if a customer is willing to pay his or her debts.
6. a. B: A is likely to sell for cash only, unless the product really works. If it does, then they might
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7. The three main categories of inventory are: raw material (initial inputs to the firm’s production
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
1. a. There are 30 days until account is overdue. If you take the full period, you must remit:
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2. The receivables turnover is:
3. a. The average collection period is the percentage of accounts taking the discount times the discount
4. The daily sales are:
5. The interest rate for the term of the discount is:
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So, using the EAR equation, the effective annual interest rate is:
a. The periodic interest rate is:
b. The EAR is:
c. The EAR is:
6. The receivables turnover is:
7. The total sales of the firm are equal to the total credit sales since all sales are on credit, so:
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8. The average collection period is the net credit terms plus the days overdue, so:
9. a. The cash outlay for the credit decision is the variable cost of the engine. If this is a one-time
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c. If the customer will become a repeat customer, the cash inflow changes. The cash inflow is now
10. The cost of switching is the lost sales from the existing policy plus the incremental variable costs under
the new policy, so:
11. The carrying costs are the average inventory times the cost of carrying an individual unit, so:
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The order costs are the number of orders times the cost of an order, so:
12. The carrying costs are the average inventory times the cost of carrying an individual unit, so:
Intermediate
13. The total carrying costs are:
14. The cash flow from either policy is:
15. The cash flow from the old policy is:
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The cost of switching credit policies is:
16. If the cost of subscribing to the credit agency is less than the savings from collection of the bad debts,
the company should subscribe. The cost of the subscription is:
Challenge
17. The cost of switching credit policies is:
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19. From Problem 15, the incremental cash flow from the new credit policy will be:
20. Since the company sells 700 suits per week, and there are 52 weeks per year, the total number of suits
sold is:
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21. The cash outlay for the credit decision is the variable cost of the engine. Since the orders can be one-
APPENDIX 20A
1. The cash flow from the old policy is the quantity sold times the price, so:
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2. a. The old price as a percentage of the new price is:
b. We are unable to determine for certain since no information is given concerning the percentage
d. No, because:
This implies that the break-even discount is:
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3. a. The cost of the credit policy switch is the quantity sold times the variable cost. The cash inflow
c. Effectively, the cash discount is:
4. a. The cash discount is:
b. Due to the increase in both quantity sold and credit price when credit is granted, an additional
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5. We can express the old cash flow as:
