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SOLUTIONS CHAPTER 7

# SOLUTIONS CHAPTER 7 - CHAPTER 7 CURRENT ASSET MANAGEMENT...

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Unformatted text preview: CHAPTER 7 CURRENT ASSET MANAGEMENT 7-1 (a) Cash cycle = 60 days + 80 days – 50 days = 90 days (b) Cash turnover (c) Minimum cash (d) Cash cycle = 60 days + 80 days - 68 days = 72 days Cash turnover Minimum cash / New Cash turnover Savings = 0.20(\$500,000 - \$400,000) = \$20,000 7-2 (a) The adoption of a lock-box system would save a total of 3 days. The amount of reduction in cash balance = 3 x \$1,000,000 = \$3,000,000 (b) The opportunity cost in \$ = \$3,000,000 x 0.05 = \$150,000 (c) The system should be adopted because the opportunity cost of the current system (\$150,000) is greater than the cost of the lock-box system (\$50,000). 7-3 Credit sales = \$12,500,000 x 80% = \$10,000,000 Current receivable turnover New receivable turnover Increase in unit sales volume Marginal profit on sales (2,000)(\$1,000 - \$800) \$400,000 New level of receivables [\$10,000,000(1 + 0.20)]/5 \$2,400,000 Current level of receivables \$10,000,000/10 1,000,000 Additional receivables \$1,400,000 Cost of marginal investment \$1,400,000 x 0.10 140,000 Bad-debt losses—new policy \$12,000,000 x 0.02 \$ 240,000 Bad-debt losses—current policy \$10,000,000 x 0.01 100,000 Cost of marginal bad debt losses 140,000 Net gain from new credit policy \$120,000 Because the marginal profit on sales of \$400,000 exceeds the marginal cost of \$280,000 (\$140,000 + \$140,000), Corner Creations by Dana should adopt the proposed credit policy. 7-4 Credit Marginal Profit Additional Marginal Policy on Sales Receivables Investment Gain A \$5,000 \$18,000 \$3,600 \$1400 B 4,000 15,000 3,000 1000 C 3,000 15,000 3,000 D 2,000 16,000 3,200 <1200> E 1,000 14,000 2,800 <1800> To produce the greatest gain, the company should select Policy A. 7-5 (a) (b) Optimum # of orders = (c) Total inventory cost = \$2,000 + \$2,000 = \$4,000 (d) Because the company will have to place an order of 2,000 units every ten days 200 days/20 orders), the daily rate of use is 200 units (2,000 units/10 days). Reorder point = 500 + 2 x 200 = 900 units (e) Total inventory cost at 3,000 boxes = \$4,333 Because the total inventory cost at 2,000 boxes was \$4,000, the total inventory cost would increase by \$333 (\$4,333 - \$4,000). Saving = \$0.02 x 40,000 = \$800 The savings exceed the total inventory cost increase and consequently the company should take the quantity discount....
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SOLUTIONS CHAPTER 7 - CHAPTER 7 CURRENT ASSET MANAGEMENT...

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