-GITM.appB.B1-30.

CTP 12/7/04 7:25 PM Page B-25

Solutions to Self-Test Problems B-24

Chapter 14

ST141 Basic data

Time component Current Proposed

Average payment period (APP) 10 days 30 days

Average collection period (ACP) 30 days 30 days
Average age of inventory (AAI) 40 days 40 days

Cash conversion cycle (CCC)
AAI  ACP  APP

CCCcurrent
40 days  30 days  10 days
60 days
CCCproposed
40 days  30 days  30 days
40 days
Reduction in CCC 20 days
Annual operating cycle investment
$18,000,000
Daily expenditure
$18,000,000  365
$49,315
Reduction in resource investment
$49,315  20 days
$986,300
Annual profit increase
0.12  $986,300
$118,356

ST142 a. Data:
S
60,000 gallons
O
$200 per order
C
$1 per gallon per year
Calculation:
23S3O

EOQ 5
C

2 3 60,000 3 $200

5
$1

5 "24,000,000
5 4,899 gallons

b. Data:
Lead time
20 days
Daily usage
60,000 gallons/365 days

164.38 gallons/day
Calculation:
Reorder point
lead time in days  daily usage

20 days  164.38 gallons/day

3,287.6 gallons

ST143 Tabular Calculation of the Effects of Relaxing Credit Standards on Regency Rug
Repair Company:
-GITM.appB.B1-30.CTP 12/7/04 7:25 PM Page B-26

B-25 APPENDIX B

Additional profit contribution from sales

[4,000 rugs  ($32 avg. sale price  $28 var. cost)] $16,000
Cost of marginal investment in accounts receivable
Average investment under proposed plan:
($28 3 76,000 rugs) $2,128,000

$280,000
365>48 7.6
Average investment under present plan:
($28 3 72,000 rugs) $2,016,000

221,538
365>40 9.1
Marginal investment in A/R $ 58,462
Cost of marginal investment in
A/R (0.14  $58,462) ($ 8,185)
Cost of marginal bad debts
Bad debts under proposed plan
(0.015  $32  76,000 rugs) $ 36,480
Bad debts under present plan
(0.010  $32  72,000 rugs) 23,040
Cost of marginal bad debts ($13,440)
Net loss from implementation of proposed plan ($ 5,625)

Recommendation: Because a net loss of $5,625 is expected to result from

relaxing credit standards, the proposed plan should not be implemented.

Chapter 15

ST151 a.
Approximate cost of
Supplier giving up cash discount

X 1%  [365/(55  10)]
1%  365/45
1%  8
8.1%

Y 2%  [365/(30  10)]
2%  365/20
2%  18
36.5%
Z 2%  [365/(60  20)]
2%  365/40
2%  9
18.3%

b. Supplier Recommendation

X 8.1% cost of giving up discount  15% interest cost from bank;

therefore, give up discount.
Y 36.5% cost of giving up discount  15% interest cost from bank;
therefore, take discount and borrow from bank.
Z 18.3% cost of giving up discount  15% interest cost from bank;
therefore, take discount and borrow from bank.

c. Stretching accounts payable for supplier Z would change the cost of giving
up the cash discount to
2%  [365/[(60  20)  20])
2%  365/60
2%  6.1
12.2%
In this case, in light of the 15% interest cost from the bank, the recommended
strategy in part b would be to give up the discount, because the 12.2% cost of
giving up the discount would be less than the 15% interest cost from the bank.