Exam 18: Management of Accounts Receivable and Inventories

When a company measures its marginal costs and marginal returns it is developing:

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.)

____are useful in monitoring the status and composition of a firm's accounts receivable.

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

Capacity, which is one of the traditional "five Cs" of credit analysis, refers to

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

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.

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?

To minimize the possibility of running out of inventory, most companies add a ____ to their inventory.

The primary goal of accounts receivable management should be

All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except

All of the following are possible solutions to a large bad-debt loss ratio EXCEPT:

Safety stock is needed to absorb

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. 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)

The most widely known credit reporting organization is:

Accounts receivable consist of the credit of the business. It can take the form of which of the following? I. Trade credit II. Consumer credit

In general, the ____ a firm's production cycle, the ____ its work-in-process inventory.

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?

All of the following are components of carrying costs except: