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Chapter 3: 3DQ (page 182)

What is the significance to working capital management of matching sales and production?

Short Answer

Expert verified

An organization can keep a minimum level of inventory if the sales and production are matched.This helps in managing the working capital working capital with ease.

Step by step solution

01

Working capital management

The process of managingthe current assets and liabilities of a company is called working capital management. This process requires the management to efficiently utilize its resources to increase its earnings.

02

The significance of matching sales and production

Matching of sales and production will ensure that the company can keep a minimum balance of inventory. This will result in low investment in the company’s inventory and lower the financing costs.

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Most popular questions from this chapter

Question: Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of \(6 per order, and carrying costs of \)2.40 per pipe.

b. How many orders will be placed during the year?

Explain how rapidly expanding sales can drain the cash resources of a firm.

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be \)240,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

Colter Steel has \(4,200,000 in assets.

Temporary current assets

\)1,000,000

Permanent current assets

\(2,000,000

Fixed assets

\)1,200,000

Total assets

\(4,200,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
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