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Chapter 3: Q2BP_c (page 220)

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.

c. If the total cost of the new system is $400,000, should it be implemented?

Short Answer

Expert verified

The organization should implement the new system as the benefit is more than its cost.

Step by step solution

01

Factors to be considered before implementing a plan

The organization should consider the following factors before implementing a plan:

  • The cost of the plan to the organization and its impact on the organizational operations.
  • The benefits to be generated by the organization after implementation of the plan.
  • The infrastructure required for appropriately implementing and using a plan.
02

Selection of plan

The plan should be implemented by the organization as the cost of this system will be $400,000 but the amount of cash freed up by the system will be $7,275,000 and the investment of the freed-up cash will generate $436,500 interest income for the organization.

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Most popular questions from this chapter

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.

What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for $1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

a. Generate a monthly production and inventory schedule in units. Beginning inventory in January is 12,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)

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.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are \)240,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.

If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?
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