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The document contains three business cases: 1) For a company with a 30 day collection period, 40 day inventory, and considering stretching accounts payable by 20 days, extending payables by 20 days could save the company money on its 12% annual financing costs. 2) Calculating economic order quantity and reorder point for a company that uses 60,000 gallons of pigment per year at a constant rate, with $200 ordering costs and $1 per gallon annual carrying costs. 3) Whether a rug repair company that does 72,000 repairs per year at $32 each, with 1% bad debts and 40 day collection, should relax credit to increase sales by 4,000 repairs but with 1

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Nahidul Islam IU
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4K views3 pages

Math

The document contains three business cases: 1) For a company with a 30 day collection period, 40 day inventory, and considering stretching accounts payable by 20 days, extending payables by 20 days could save the company money on its 12% annual financing costs. 2) Calculating economic order quantity and reorder point for a company that uses 60,000 gallons of pigment per year at a constant rate, with $200 ordering costs and $1 per gallon annual carrying costs. 3) Whether a rug repair company that does 72,000 repairs per year at $32 each, with 1% bad debts and 40 day collection, should relax credit to increase sales by 4,000 repairs but with 1

Uploaded by

Nahidul Islam IU
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

Cash conversion cycle: Hurkin Manufacturing Company pays accounts payable on the tenth
day after purchase. The average collection period is 30 days, and the average age of
inventory is 40 days. The firm currently has annual sales of about $18 million and purchases
of $14 million. The firm is considering a plan that would stretch its accounts payable by 20
days. If the firm pays 12% per year for its resource investment, what annual savings can it
realize by this plan? Assume a 360- day year.

Solution:

2. EOQ analysis: Thompson Paint Company uses 60,000 gallons of pigment per year. The cost
of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1
per gallon per year. The firm uses pigment at a constant rate every day throughout the year.
a. Calculate the EOQ.
b. Assuming that it takes 20 days to receive an order once it has been placed, determine
the reorder point in terms of gallons of pigment. (Note: Use a 365-day year.)

Solution:

3. Relaxing credit standards: Regency Rug Repair Company is trying to decide whether it
should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of
$32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and
the variable cost per unit is $28. Regency expects that if it does relax its credit standards, the
average collection period will increase to 48 days and that bad debts will increase to 11/2%
of sales. Sales will increase by 4,000 repairs per year. If the firm has a required rate of return
on equal-risk investments of 14%, what recommendation would you give the firm? Use your
analysis to justify your answer. (Note: Use a 365-day year.)
Solution:

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