1.Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60".

Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from
annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average
collection period.

Average collection period = 60 + 28 = 88 days

2. Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from
annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average
investment in receivables.

Average Investment in Receivables = $300,000,000 x 88 /365 = $72,328,767

3. Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The
firm's variable cost ratio is 0.75 (i.e. variable costs are 75 percent of sales). When converting from annual
to daily data or vice versa, assume there are 365 days per year. Suppose that Mace's sales are expected to
increase by 20 percent next year and, through more effective collection methods, the firm is able to
reduce its average collection period by 20 days. Determine the firm's average investment in receivables
for next year under these conditions.

Average investment in receivables = $360,000,000 /365 x 68 = $67,068,493

4. Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30."
Currently, the firm's average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within
10 days. The firm expects 50 percent of it's customers to take the discount and it's average collection
period to decline to 30 days. The firm's required pretax return (i.e. opportunity cost) on receivables
investment is 16 percent. Determine the cost of the cash discounts to Warren.

Cost of cash discounts = $30,000,000 x 0.50 x 0.02 = $300,000

5. Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30."
Currently, the firm's average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within
10 days. The firm expects 50 percent of it's customers to take the discount and it's average collection
period to decline to 30 days. The firm's required pretax return (i.e. opportunity cost) on receivables
investment is 16 percent. Determine Warren's pretax earnings on the funds released from the reduction in
receivables. (Assume a 365 day year)
Reduction in A/R = $30,000,000/365 x 48 - $30,000,000/365 x 30 = $1,479,452
Earnings on Released Funds = $1,479,452 x 0.16 = $236,712

6. Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30."
Currently, the firm's average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills
within 10 days. The firm expects 50 percent of it's customers to take the discount and it's average
collection period to decline to 30 days. The firm's required pretax return (i.e. opportunity cost) on
receivables investment is 16 percent. Determine the net effect on Warren's pretax profits of offering a 2
percent cash discount.

Net Change in Pretax Profits = $236,712 - $300,000 = -$63,288

7. Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of
being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million
annually. Based on past experience with these types of customers, the firm estimates that the average
collection period would be 90 days and that the bad-debt loss ratio would be 6 percent. The firm's variable
cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return
(i.e., opportunity cost) on receivables investments is 20 percent. When converting from annual to daily or
vice versa, assume there are 365 days per year. If Bluegrass Distilleries extends credit to these (previously
delinquent) customers, determine the increase in the investment in receivables.

Additional receivables investment = $10,000,000/365 x 90 = $2,465,753

8. Whirlwind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are
$182,500,000 spread evenly throughout the year and its accounts average 20 days overdue. The firm's
variable cost ratio is 0.70. Determine Whirlwind's average investment in receivables. (Assume 365 days
per year an all calculations.)

Average collection period = 30 + 20 = 50 days

Average investment in receivables = ($182,500,000)/365) x 50 = $25,000,000

9. If a lawn mower assembly plant orders 25,000 frames per year at a price of $27 each, what is the EOQ
if the ordering cost per order is $35 and the annual inventory carrying cost is 12 percent?

Q = [(( 2)(35)(25,000))/(.12)(27)].5 = 734.9

10. What is the optimal length of one inventory cycle for a firm that has an economic order quantity of
750 units, average daily demand of 68 units, and a price of $30 per unit?

T = 750/68 = 11.03 or 11 days

10. Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual
inventory carrying costs are 12% and the cost of placing an order is $90, what is the firm's EOQ?

Q = [(2)(90)(1400))/(54.30)(.12)].5 = 196.66 or 197

11.Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual
inventory carrying costs are 12% and the cost of placing an order is $90, what is the optimal ordering
frequency?

T = 197/(1400/365) = 51.3 or 51 days

12. Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual
inventory carrying costs are 12% and the cost of placing an order is $90, what is the total annual
inventory costs?

TC = (1400/197)90 + (197/2)(54.30)(.12) = $1,281

13. Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for
$370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the inventory
value. What is the EOQ for Haulsee?

Q = [(2)(540)(800,000))/(370)(.14)].5 = 4,084

14.Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for
$370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the inventory
value. What is the total inventory costs?

TC = 800,000(540) + 4084 (51.80)

               4, 084            2
= $211,554

15. Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for
$370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the inventory
value. What is the optimal ordering frequency?

T = 365(4084) = 1.86
        800,000

16.Technico manufactures about 800,000 solar calculators per year. The computer chip used in the
calculator cost $4.80 each and the cost of placing an order is $65. If the carrying costs are 16%, what is
the EOQ for the chips.
Q = [((2)(65)(800,000))/.768].5 = 11,637

16. Willoughby Industries, Inc. is considering whether to discontinue offering credit to customers who
are more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are
$10 million on credit terms of "net 30". Such a change in policy is expected to reduce sales by 10
percent, cut the firm's bad-debt losses from 5 to 3 percent, and reduce its average collection period
from 72 days to 45 days. The firm's variable cost ratio is 0.70 (profit contribution ratio is 0.30) and its
required pretax return (i.e. opportunity cost) on receivables investments is 25 percent. Determine the
net effect of this credit tightening policy on the pretax profits of Willoughby. When converting from
annual to daily data or vice versa, assume that there are 365 days per year.

Reduction in Profit Contribution = $1,000,000 x 0.30 = $300,000

Reduction in A/R = $10,000,000/365 x 72 - $9,000,000/365 x 45 = $863,014
Earnings on Released Funds = $863,014 x 0.25 = $215,753
Decrease in Bad-Debt Losses = $10,000,000 x 0.05 - $9,000,000 x 0.03 = $230,000
Net Change in Pretax Profits = $215,753 + $230,000 - $300,000 = $145,753

17.Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of
being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million
annually. Based on past experience with these types of customers, the firm estimates that the average
collection period would be 90 days and that the bad-debt loss ratio would be 6 percent. The firm's
variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax
return (i.e., opportunity cost) on receivables investments is 20 percent. When converting from annual to
daily data or vice versa, assume there are 365 days per year. If Bluegrass extends full credit to these
(previously delinquent) customers, determine the total increase in credit-related costs.

Cost of additional receivables investment = $10,000,000/365 x 90 x 0.20 = $493,151

Bad debt losses = 0.06 x $10,000,000 = $600,000
Total costs = $493,151 + $600,000 = $1,093,151

18. Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of
being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million
annually. Based on past experience with these types of customers, the firm estimates that the average
collection period would be 90 days and that the bad-debt loss ratio would be 6 percent. The firm's variable
cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return
(i.e., opportunity cost) on receivables investments is 20 percent. When converting from annual to daily
data or vice versa, assume there are 365 days per year. Determine the net effect on Bluegrass Distilleries'
pretax profits of extending credit to these (previously delinquent) customers

Net Change in Pretax Profits = $10,000,000 x 0.20 - ($10,000,000/365 x 90 x 0.20) -

  0.06 x $10,000,000 = $906,849
19. The United Shoe Company (USC) does not extend credit to any retail shoe store with a "Fair" or
"Limited" Dun and Bradstreet credit rating. As a result of this policy the company loses $36,500,000 in
sales each year. Based on prior experience with these types of customers, USC estimates that the
average collection period would be 120 days and the bad-debt loss ratio would be 10%. The firm's
variable cost ratio is 0.75. USC's required pretax return on receivables investments is 18%. Determine
the net change in pretax profits of extending credit to these retail shoe stores. (Assume 365 days per
year in any calculations.)

Additional sales = $36,500,000

Marginal profitability of additional sales = 0.25 x $36,500,000 = $9,125,000
Additional investment in receivables = ($36,500,000/365) x 120 = $12,000,000
Cost of additional investment in receivables = $12,000,000 x 0.18 = $2,160,000
Additional bad-debt loss = 0.10 x $36,500,000 = $3,650,000
Net change in pretax profits = $9,125,000 - $2,160,000 - $3,650,000 = $3,315,000

20.Wallace Company sells $73 million of its products to retailers on credit terms of "net 30". Its average
collection period is 55 days. To speed up the collection of receivables, the company is considering
changing its credit terms to "2/10, net 30". The company expects 40% of its customers to take the cash
discount and its average collection period to decline to 35 days. Wallace's required pretax rate of return
on receivables investments is 15%. Determine the net effect on Wallace's pretax profits of the change in
credit terms. (Assume 365 days per year in any calculations.)

Solution:
Decrease in average receivables balance = ($73,000,000/365) x 55
- ($73,000,000/365) x 35 = $4,000,000
Earnings on funds released by the decrease in receivables
= $4,000,000 x 0.15 = $600,000
Cost of cash discount = $73,000,000 x 0.4 x 0.02 = $584,000
Net change in pretax profits = $600,000 - $584,000 = $16,000