Adeva, Maria Kathreena Andrea H.

BSA 2-11

Chapter 4: Receivable Management

Problems
4-3 Kisha Company

1) Estimated decrease in sales

Less: Variable Cost 500,000 x 60%
Decrease in profit from sales

2) Total variable cost of annual sales:

Present plan 4,000,000 x 60%
Proposed plan 3,500,000 x 60%
Turnover of accounts receivable:
Present plan 360/40
Proposed plan 360/30
Average investment in accounts receivable:
Present plan 2,400,000/9
Proposed plan 2,100,000/12

Average investment under present plan

Less: Average investment under proposed plan
Marginal investment in accounts receivable
Multiplied by cost of carrying receivables
Savings from marginal investment in accounts receivable

3) Bad debts under present plan 4,000,000 x 5%

Less: Bad debts under proposed plan 3,500,000 x 2%
Savings from marginal bad debt

4-6 GGEM

1) Selling Price
Unit sales expected from proposed plan
Expected gross sales from proposed plan
Multiplied by expected % of sales that will avail the discount
Sales from customers paying within the discount period
Proposed cash discount
Cost of cash discount

2) Additional contribution margin:

Under proposed plan 715
 Under present plan 700
Margin (in units) 15
Multiplied by:
Selling price 25,000
VC per unit -18,750 6,250
Cost of marginal investment in AR:
Average investment without discount:
Present sales 700
VC per unit 18,750 13,125,000
Divided by:
AR turnover: 360/90 4 3,281,250
Average investment with discount:
Proposed sales 715
VC per unit 18,750 13,406,250
Divided by:
AR turnover: 360/72 5 2,681,250
Reduction in AR investment 600,000
Multiplied by required return on investment 20%
Savings from marginal bad debt
Present sales 700
Selling price 25,000
Total 17,500,000
Multiplied by bad debt rate 0.025%
Less: Cost of cash discount - see (1)
Net profit (loss) of initiating a cash discount

4-9 Lodi Optical, Inc.

1) Total variable cost of annual sales:

Present plan 700 x 18,750
Proposed plan 715 x 18,750
Turnover of accounts receivable:
Present plan 360/90
Proposed plan 360/72
Average investment in accounts receivable:
Present plan 13,125,000/4
Less: Proposed plan 13,406,250/5
Marginal investment in accounts receivable - proposed plan

2) Average investment under present plan

Less: Average investment under proposed plan
Marginal investment in accounts receivable
Multiplied by required return on investment
 Cost of marginal investment in accounts receivable - proposed

3) Present sales
Selling price
Total
Multiplied by bad debt rate
Savings from marginal bad debt

4) Selling Price
Unit sales expected from proposed plan
Expected gross sales from proposed plan
Multiplied by expected % of sales that will avail the discount
Sales from customers paying within the discount period
Proposed cash discount
Cost of cash discount

5) Additional contribution margin:

Under proposed plan 715
Under present plan 700
Margin (in units) 15
Multiplied by:
Selling price 25,000
VC per unit -18,750 6,250
Cost of marginal investment in AR:
Average investment without discount:
Present sales 700
VC per unit 18,750 13,125,000
Divided by:
AR turnover: 360/90 4 3,281,250
Average investment with discount:
Proposed sales 715
VC per unit 18,750 13,406,250
Divided by:
AR turnover: 360/72 5 2,681,250
Reduction in AR investment 600,000
Multiplied by required return on investment 20%
Savings from marginal bad debt
Present sales 700
Selling price 25,000
Total 17,500,000
Multiplied by bad debt rate 0.025%
Less: Cost of cash discount - see (4)
Net profit (loss) of initiating a cash discount
Chapter 5: Inventory Management
Multiple choice problems
4 Wheels Company

Annual demand
Multiplied by
Multiplied by ordering cost
Total
Divided by carrying cost per unit
Economic Order Quantity D

7 Politan Company

Numerator:
Annual demand 4,000
Multiplied by 2
Multiplied by setup cost 2
Total
Denominator:
Economic Order Quantity 200
Multiplied by itself 200
Carrying cost per unit D

8 Garmar, Inc.

Numerator:
Economic Order Quantity 5,000
Multiplied by itself 5,000
Denominator:
Ordering cost 50
Multiplied by 2
Total 100
Divided by carrying cost per unit 4
Estimated annual usage in units A

9 Barter Corporation

Annual demand 1,200 x 3

Multiplied by
Multiplied by ordering cost
Total
Divided by carrying cost per unit
 Economic Order Quantity B

10 Neggie Corp

Numerator:
Annual demand 13,680 x 4 54,720
Multiplied by 2
Multiplied by ordering cost 12.5
Total
Denominator:
Economic Order Quantity 1,200
Multiplied by itself 1,200
Carrying cost per unit B

11 Maximum daily usage

Less: Average daily usage (13,680/3 months) / 30 days
Total
Multiplied by lead time
Safety stock A

12 Carrying cost:
Economic Ordering Quantity 1,200
Divided by 2
Total 600
Multiplied by carrying cost per unit 0.95
Ordering Cost:
Annual demand 54,720
Divided by EOQ 1,200
Total number of orders in a year 45.6
Multiplied by ordering cost per unit 12.5
Total inventory cost D

14 General Chemical Company

Average daily usage 150,000/30 days

Multiplied by lead time
Reorder point C

Chapter 6: Short Term Financing Management

6-3 Carmen Traders, Inc.

 1) Invoice Amount
Less: 2% Discount 100,000 x 2%
Net amount of funds needed

2) Principal amount of the loan 98,000/1-(10%+1%)

3) Annual Interest Expense 110,112 × 12%

Divided by amount of funds needed - see (1)
Effective annual interest rate

4) Effective annualized cost (2/98) x [360/(30-10)]

6-5 Graveler Mining

CASE A

1) Principal loan
Less: Compensating balance:
Stated compensating balance 100,000 x 15% 15,000
Average compensating balance 10,000
Loan proceeds

2) Principal loan
Multiplied by stated interest rate
Interest to be repaid on the amount borrowed

3) Interest to be repaid on the amount borrowed - see (2)

Divided by loan proceeds - see (1)
Effective annual interest rate

CASE B

1) Amount borrowed:
Loan proceeds 100,000
Divided by stated % CB 1-15% 85%
Multiplied by stated interest rate
Interest to be repaid on the amount borrowed

2) Loan proceeds
Divided by stated % compensating balance 1-15%
Amount borrowed

6-6 Effective annualized cost (3/97) x [360/(45-10)]

6-7 Interest to be repaid on the amount borrowed:
Principal loan 250,000
Multiplied by stated interest rate 6%
Divided by loan proceeds:
Principal loan 250,000
Less: Compensating balance:
Stated CB 250,000 × 20% 50,000
Average CB 25,000 25,000
Effective annual interest rate

6-8 NOP Co.

1) Loan proceeds
Divided by:
Stated interest rate on note 10%
Stated compensating balance 15%
Principal amount of the loan

2) Interest to be repaid on the amount borrowed:

Principal loan 2,000,000
Multiplied by stated interest rate 10%
Divided by loan proceeds
Effective annual interest rate

6-10 GHI Company

Interest expense on average balance 100,000 x 6%

Add: Commitment fee on unused portion (300,000 - 100,000) x 0.5%
Annual cost (in pesos) of this financing arrangement
 500,000
300,000
200,000

2,400,000
2,100,000

9
12

266,667
175,000

266,667
-175,000
91,667
12%
11,000

200,000
70,000
130,000

25,000
715
17,875,000
75%
13,406,250
2%
268,125
 93,750

120,000

4,375
-268,125
- 50,000

13,125,000
13,406,250

4
5

3,281,250
-2,681,250
600,000

3,281,250
-2,681,250
600,000
20%
 120,000

700
25,000
17,500,000
0.025%
4,375

25,000
715
17,875,000
75%
13,406,250
2%
268,125

93,750

120,000

4,375
-268,125
- 50,000
 4,000
2
20
160,000
0.60
516

16,000

40,000
0.40

25,000,000

25
1,000,000

3,600
2
200
1,440,000
25
 240

1,368,000

1,440,000
0.95

175
152
23
6
138

570

570
1,140

5,000
18
90,000
 100,000
2,000
98,000

110,112

13,213
98,000
13.48%

36.73%

100,000

5,000
95,000

100,000
7.50%
7,500

7,500
95,000
7.89%

117,647.06
7.50%
8,823.53

100,000
85%
117,647.06

31.81%
 15,000

225,000
6.67%

1,500,000

75%
2,000,000

200,000
1,500,000
13.33%

6,000
1,000
7,000