1) The document calculates key financial metrics like cash conversion cycle, daily cash operating expenditures, and potential increase in annual profits from improving the cash conversion cycle for a manufacturing firm.
2) It then summarizes the firm's monthly funding requirements, calculating average permanent and seasonal components. It describes aggressive and conservative funding strategies and calculates costs of each.
3) The summary analyzes how changing variables in the economic order quantity model like order costs and carrying costs impact the model results. It illustrates tradeoffs between aggressive and conservative inventory funding strategies.
4) Additional documents calculate reorder points, safety stock, costs of relaxing credit standards, and whether proposed changes would be recommended based on financial impacts. They analyze how changes to
1) The document calculates key financial metrics like cash conversion cycle, daily cash operating expenditures, and potential increase in annual profits from improving the cash conversion cycle for a manufacturing firm.
2) It then summarizes the firm's monthly funding requirements, calculating average permanent and seasonal components. It describes aggressive and conservative funding strategies and calculates costs of each.
3) The summary analyzes how changing variables in the economic order quantity model like order costs and carrying costs impact the model results. It illustrates tradeoffs between aggressive and conservative inventory funding strategies.
4) Additional documents calculate reorder points, safety stock, costs of relaxing credit standards, and whether proposed changes would be recommended based on financial impacts. They analyze how changes to
1) The document calculates key financial metrics like cash conversion cycle, daily cash operating expenditures, and potential increase in annual profits from improving the cash conversion cycle for a manufacturing firm.
2) It then summarizes the firm's monthly funding requirements, calculating average permanent and seasonal components. It describes aggressive and conservative funding strategies and calculates costs of each.
3) The summary analyzes how changing variables in the economic order quantity model like order costs and carrying costs impact the model results. It illustrates tradeoffs between aggressive and conservative inventory funding strategies.
4) Additional documents calculate reorder points, safety stock, costs of relaxing credit standards, and whether proposed changes would be recommended based on financial impacts. They analyze how changes to
1) The document calculates key financial metrics like cash conversion cycle, daily cash operating expenditures, and potential increase in annual profits from improving the cash conversion cycle for a manufacturing firm.
2) It then summarizes the firm's monthly funding requirements, calculating average permanent and seasonal components. It describes aggressive and conservative funding strategies and calculates costs of each.
3) The summary analyzes how changing variables in the economic order quantity model like order costs and carrying costs impact the model results. It illustrates tradeoffs between aggressive and conservative inventory funding strategies.
4) Additional documents calculate reorder points, safety stock, costs of relaxing credit standards, and whether proposed changes would be recommended based on financial impacts. They analyze how changes to
b. Calculate the firm's daily cash operating expenditure.
How much in resources must be invested to support its cash conversion cycle?
Daily Cash Operating Expenditure: Total annual sales (outlays)/365= 9589.04
Resources needed: Daily Expenditure x CCC= 677226.03
c. If the firm pays 14% for these resources, by how much would it increase its annual profits by favorably changing its current cash conversion cycle by 20 days?
Additional profit financing sale: Daily Expenditure x 20 days x 14% = 26849.32
a. Divide the firm's monthly funds requirement into
(1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
Total Funds Permanent Seasonal
Months Requirements Requirements Requirements Jan $ 2,000,000 $ 2,000,000 $ - Feb $ 2,000,000 $ 2,000,000 $ - Mar $ 2,000,000 $ 2,000,000 $ - Apr $ 4,000,000 $ 2,000,000 $ 2,000,000 May $ 6,000,000 $ 2,000,000 $ 4,000,000 Jun $ 9,000,000 $ 2,000,000 $ 7,000,000 Jul $ 12,000,000 $ 2,000,000 $ 10,000,000 Aug $ 14,000,000 $ 2,000,000 $ 12,000,000 Sep $ 9,000,000 $ 2,000,000 $ 7,000,000 Oct $ 5,000,000 $ 2,000,000 $ 3,000,000 Nov $ 4,000,000 $ 2,000,000 $ 2,000,000 Dec $ 3,000,000 $ 2,000,000 $ 1,000,000
Average Permanent Requirements = $ 2.000.000
Average Seasonal Requirements = Total Seasonal Requirements/12 = $ 48.000.000/12 = $ 4.000.000
b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) aconsevative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are use to finance seasonal needs.
--> 1. If funding strategy is aggressive, the company will borrow one million to twelve million in accordance with has been scheduled in the seosonal requirements or in this case in table a for a short period of time. Another case, if company borrows two million or for permanent requirements from the time period specified in long-term funding. 2. If funding strategy is conservative, the company will borrow at most forteen million for the long term
c. Assuming that short-term funds cost 12% annually and that the cost of long-term funds in 17% annually, use the averages found in part 'a' to calculate the total cost of each of the strategies described in part 'b'.
Aggressive: ($ 2.000.000 x 17%)+($ 4.000.000 x 12%)
d. Discuss the profirtability-risk trade-offs associated with the aggressive strategy
and those associated with the conservative strategy.
---> If the funding strategy, then the possibility of a high return will guarantee a higher risk too. if the stargo conservative, the company is required to pay interest on funds that are not needed, the cost will be highe So, in my opinion, aggressive strategies will be more profitable, but more risky than conservative strateg elve million his case in table or for permanent
n million for the long term
higher risk too. if the stargor is needed, the cost will be higher. sky than conservative strategies P15-5 EOQ Analysis
a. Determine the EOQ under each of the following conditions:
(1) no charges, (2) order cost of zero, and (3) carrying cost of zero.
1. No charges
= 10540.926
$2 x 27% 2. Order cost of zero
= 0
3. Carrying cost of zero
= ∞/ Undefined
b. What do your answers illustrate about the EOQ model? Explain.
---> In managing inventory stock business, known as inventory management,
we know the term model of economic order quantity (EOQ). EOQ in inventory settings aims to minimize total costs, and keep inventory and ordering costs. P15-6 EOQ, Reorder Point, and Safety Stock
a. Calculate the EOQ
= 200
b. Determine the average level of inventory.
(Note: use a 365-day year to calculate daily usage)
Average level of inventory =
= 121.92
c. Determine the reorder point.
= 32.88
d. Indicate which of the following variables change if the firm does not hold the safety stock: (1) order cost, (2) carrying cost, (3) total inventory stock, (4) reorder point, (5) EOQ. Explain.
Change: Carrying Cost, Total Inventory Cost, and Reorder Point
Don't change: Ordering Cost and EOQ P15-9 Account Receivable Changes With Bad Debts
a. What are bad debts in dollars currently and under the proposed change?
Bad debts Proposed Plan 4% x $20 x 60.000 = $ 48,000
b. Calculate the cost of the marginal bad debts to the firm.
Proposed Plan 4% x $20 x 60.000 = $ 48,000
Present Plan 2% x $20 x 50.000 = $ 20,000 Cost of marginal bad debts $ 28,000
c. Ignoring the additional profit contribution from increased sales, if the
proposed change saves $3.500 and causes no change in the average investment in accounts receivable, would you recommend it? Explain.
---. In My opinion, nothing is needed if the marginal cost of bad debts exceeds savings of $ 3.500
d. Considering all changes in costs and benefits, would you recommend the proposed change? Explain.
Additional profit contribution for sales:
10.000 additional units x (20-15) $ 50,000 Part 'b' $ (28,000) Savings $ 3,500 Net benefit from proposed plan $ 25,500
---> In my opinion, the above method is recommended because the increase and savings of 3,800 exceed the increase in the actual loss of accounts receivable
e. Compare and discuss your answers in part c and d.
- P15-10 Relaxation of Credit Standards
Additional Profit From Sales:
1.000 additional units x (40-31) = $ 9,000
Cost of marginal sales in AR:
Average investment (proposed plan):
= $ 56,054.79
Average investment (present plan):
= $ 42,041.10
Marginal investment in AR $ 14,013.70
Required return of investment 25% Cost of marginal investment in AR $ (3,503.42) Cost of marginal bad debts: Bad debts, proposed plan $40 x 11.000 x 3% $ 13,200 Bad debts, present plan $40 x 10.000 x 1% $ 4,000 Cost of marginal bad debts $ (9,200.00) Net loss from implementating $ (3,703.42) Proposed plan
So, the credit standard shouldn't be relaxed since the proposed
