Deck 10: Financial Planning, Cash Conversion, Inventory, and Receivables Management

Question 1

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's marginal profit from increased sales?

A) $500,000
B) $225,000
C) $305,000
D) $425,000

Answer 1

$225,000

Question 2

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's average investment in accounts receivables under the old credit policy?

A) $287,631
B) $236,407
C) $205,479
D) $312,175

Answer 2

$312,175

Question 3

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's average investment in accounts receivables under the new credit policy?

A) $198,488
B) $302,013
C) $215,753
D) $236,407

Answer 3

$198,488

Question 4

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's cost of the marginal investment in accounts receivables?

A) $96,534
B) $9,653
C) -$13,642
D) $11,584

Question 5

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's bad debt expense under the old credit policy?

A) $125,000
B) $100,000
C) $150,000
D) $175,000

Question 6

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's cost of marginal bad debts?

A) $150,000
B) $165,000
C) $142,500
D) $175,000

Question 7

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.

-What is Bavarian Brew's net profit (loss) from the proposed change in credit terms?

A) $61,472
B) $177,188
C) $13,660
D) $225,000

Question 8

Smart Products
Assume a 365 day year.
Smart Products buys 300,000 units of a crucial input per year from a supplier that fulfills its orders within two days of receiving them. Smart Products submits its orders directly to the supplier through a web interface, so its lead time is the supplier's two day turnaround time. Each order costs Smart Products about $500 to place, while carrying costs are about $60 per unit per year. The company seeks to maintain a five day usage level in a safety stock.

-What is Smart Products's carrying cost at the EOQ?

A) $49,320
B) $313,655
C) $42,420
D) $134,160

Question 9

Sawtooth Industries
Sawtooth Industries uses an economic order quantity (EOQ) model to manage its inventory investment. The company uses about 25,000 molded plastic assemblies each year. Order costs for these are $150 per order, while carrying costs are about $250 per unit per year. Assume a 365 day year.

-What is Sawtooth's total cost at the EOQ?

A) $43,375
B) $21,750
C) $49,025
D) $46,000

Question 10

Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI's average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-With the current standards, what is BTI's average investment in receivables?

A) $1,080,247
B) $2,157,534
C) $2,746,854
D) $3,240,741

Question 11

Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI's average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-Refer to Big Thompson. What is the forecasted increase in profits from increased sales if credit standards are changed?

A) $2,250,000
B) $450,000
C) $1,575,000
D) $675,000

Question 12

Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI's average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-What will be BTI's average investment in accounts receivable under the new standards?

A) $3,430,479
B) $3,240,741
C) $2,280,738
D) $2,746,854

Question 13

Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI's average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-Refer to Big Thompson. What is the cost of the marginal investment in accounts receivable?

A) $480,267
B) $302,055
C) $274,185
D) $178,212

Question 14

Competitive Mesh Shirts
Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.

-What is Competitive's current average investment in accounts receivable?

A) $41,095.89
B) $54,794.52
C) $821,917.81
D) not enough information is given

Question 15

Competitive Mesh Shirts
Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.

-What will be Competitive's cost of marginal investment in accounts receivable?

A) $1,479,452.84
B) $821,917.81
C) $65,753.50
D) There is not enough information given

Question 16

Competitive Mesh Shirts
Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.

-What is Competitive's marginal profit from increased sales?

A) $1,000,000
B) $5,000,000
C) $6,000,000
D) $7,000,000

Question 17

Competitive Mesh Shirts
Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.

-What is Competitive's net profit for the credit decision at hand?

A) $1,000,000.00
B) $614,246.50
C) $320,000.00
D) $65,753.50

Question 18

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-What is Smith's sustainable growth rate if the company has a dividend payout ratio of 75%?

A) 21.70%
B) 25.00%
C) 17.44%
D) 13.58%

Question 19

Bavarian Brew's schedule of projected cash disbursement
The company's purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid in the following month and the remainder in the month after that. The company's wages and salaries equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In addition, the company will pay a $175 dividend in February.

-What are Bavarian Brew's cash disbursements in April?

A) $1,1046.63
B) $729.63
C) $679.63
D) $1,229.63

Question 20

Bavarian Brew's schedule of projected cash disbursement
The company's purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid in the following month and the remainder in the month after that. The company's wages and salaries equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In addition, the company will pay a $175 dividend in February.

-What is the value of Bavarian Brew's accounts payable at the end of April?

A) $346.63
B) $500.63
C) $1,000.63
D) $754.63

Question 21

Bavarian Brew's schedule of projected cash disbursement
The company's purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid in the following month and the remainder in the month after that. The company's wages and salaries equal 15% of sales each month plus $50. Taxes of $125 are due in April. The company is going to purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In addition, the company will pay a $175 dividend in February.

-What is the value of Bavarian Brew's accounts payable at the end of March?

A) $515.25
B) $755.25
C) $1,515.25
D) $1,015.25