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Chapter 3: 2BP (page 249)
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
The firm should borrow the funds.
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Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.
b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?
What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporate borrowers?
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?
Bombs Away Video Games Corporation has forecasted the following monthly sales:
January | \(100,000 |
February | \)93,000 |
March | \(25,000 |
April | \)25,000 |
May | \(20,000 |
June | \)35,000 |
July | \(45,000 |
August | \)45,000 |
September | \(55,000 |
October | \)85,000 |
November | \(105,000 |
December | \)123,000 |
Total annual sales | \(756,000 |
Bombs Away Video Games sells the popular Strafe and Capture video games. It sells for \)5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.
Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.
a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 25,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)
Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?
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