Exam 21: The Management of Accounts Receivable and Inventories

Lengthening the credit period is likely to result in all except which of the following?

The proportion of the total receivables volume a company never collects is the ____.

All except which of the following are examples of credit-related marginal costs?

The United Shoe Company (USC) does not extend credit to any retail shoe store with a "Fair" or "Limited" Dun and Bradstreet credit rating. Because 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.)

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. To speed up the collection of receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firm's required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine the cost of the cash discounts to Warren.

The primary objective of offering a cash discount is to ____.

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. To speed up the collection of receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firm's required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine Warren's pretax earnings on the funds released from the reduction in receivables. (Assume a 365-day year.)

The reorder point is ____.

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 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%. 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%. 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

Maximizing shareholder wealth by investing in accounts receivables is considered when ____. I. marginal costs are exceeded by marginal returns. II. the cost of the funds invested are exceeded by expected marginal returns.

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?

How does an optimal credit extension policy impact a company's accounts receivables?

Safety stock is needed to absorb ____.

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%?

How can a company use its credit period to affect sales and inventory?

Each of the firms listed applied seasonal datings to the terms of credit they offer. This would be expected to generate additional sales for all except which of the firms?

Tool Mart sells 1,400 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?

Character, which is one of the traditional "five Cs" of credit analysis, refers to the ____.

The types of inventories that manufacturing firms generally hold include all except which of the following?

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%, cut the firm's bad-debt losses from 5% to 3%, 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%. 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.