Assignment_2Fall2008 - FIN 610 Short-Term Financial...

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FIN 610 Short-Term Financial Management Group Assignment #2 November 27, 2008 (Maximum of 10 per Group) PROBLEM 1 Bailey Distributing Company sells small appliances to hardware stores in the southern California area. Michael Bailey, the president of the company, is thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/l0, net 30, and the new policy would call for a 3/10, net 50. Currently, 40 percent of Bailey customers are taking the discount, and it is anticipated that this number would go up to 50 percent with the new discount policy. It is further anticipated that annual sales would increase from a level of $200,000 to $250,000 as a result of the change in the cash discount policy. The increased sales would also affect the inventory level carried by Bailey. The average inventory carried by Bailey is based on a determination of an EOQ. Assume unit sales of small appliances will increase from 20,000 to 25,000 units. The ordering cost for each order is $100 and the carrying cost per unit is $l (these values will not change with the discount). The average inventory is based on EOQ/2. Each unit in inventory has an average cost of $6.50. Cost of goods sold is equal to 65 percent of net sales, general and administrative expenses are equal to 10 percent of net sales, and interest payments of 12 percent will be necessary only for the increase in the accounts receivable and inventory balances. Taxes will equal 25 percent of before-tax income. REQUIRED: (a) Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (Total sales - Cash discounts) to determine the average daily sales and the accounts receivable balances. (b) Determine EOQ before and after the change in the cash discount policy. Translate this into average inventory (in units and dollars) before and after the change in the cash discount policy. (c) Should the new cash discount policy be utilized? Briefly comment. Page 1 of 6
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PROBLEM 2 Fresh & Fruity Foods is a mail-order company operating out of a winery near Summerland, British Columbia. The company specializes in sending British Columbian specialties to catalogue customers nationwide. Sales are seasonal, with most occurring in November and December - when people elect Fresh & Fruity s Famous Fruit Fantasy boxes as Christmas gifts. Although seasonal, the company 's sales are fairly predictable, because the bulk of Fresh & Fruity's customers are regulars who purchase year after year. The company has also managed to smooth out its sales somewhat by offering incentives,
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Assignment_2Fall2008 - FIN 610 Short-Term Financial...

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