Chap 020

Chapter 20 - Credit and Inventory Management

Chapter 20 Credit and Inventory Management Multiple Choice Questions

1. Blackwell Brothers sells men's suits. The store offers a 1 percent discount if payment is received within 10 days. Otherwise, payment is due within 30 days. This credit offering is referred to as the: A. terms of sale. B. credit analysis. C. collection policy. D. payables policy. E. collection float.

2. Jillian was recently hired by a major retail store. Her job is to determine the probability that individual customers will fail to pay for their charge sales. Jillian's job best relates to which one of the following? A. terms of sale B. credit analysis C. collection policy D. payables policy E. customer service

3. Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's: A. customer service policy. B. credit policy. C. collection policy. D. payables policy. E. disbursements policy.

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4. Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service. This 30-day period is referred to as the: A. payables period. B. cash cycle. C. transactions period. D. credit period. E. disbursement period.

5. Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill? A. ledger statement B. warranty C. indenture D. receipt E. invoice

6. Geoff Industries offers its credit customers a 2 percent discount if they pay within 10 days. This discount is referred to as a: A. cash discount. B. purchase discount. C. collection discount. D. market discount. E. receivables discount.

7. Any written proof that a customer owes you money for goods or services provided is referred to as a(n): A. account document. B. sales draft. C. credit instrument. D. commercial paper. E. letter of debt.

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8. You are viewing a graph which compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs? A. opportunity cost curve B. credit extension curve C. credit cost curve D. terms of sale graph E. optimal sales graph

9. Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF? A. credit department B. parent company C. captive finance company D. credit union E. service unit

10. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are: A. conditions, control, cessation, capital, and capacity. B. conditions, character, capital, control, and capacity. C. capital, collateral, control, character, and capacity. D. character, capacity, control, cessation, and collateral. E. character, capacity, capital, collateral, and conditions.

11. Roger's Home Appliances offers credit to customers it deems worthy of this privilege. To determine if a customer is worthy, the firm computes a numerical value which is used to estimate the probability that the customer will default if credit is granted to them. The process of computing this numerical value is referred to as: A. credit scoring. B. credit capacity. C. receipts assessment. D. conditions for credit. E. consumer analysis.

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12. You have recently been hired as an accounting intern for Jefferson Mills. The job that you have been assigned for today is to compile a spreadsheet that has six columns. The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days. You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today. Once you have completed that, you are to sort the report by customer name and then total the amounts listed in each column. What is this report called? A. credit report B. aging schedule C. risk assessment report D. turnover delineation E. receivables consolidation report

13. Bill is in charge of the inventory for Home Builder's Supply. As an inventory item gets low, he is to restock the item by a quantity that minimizes the total inventory costs for that item. What is this restocking quantity called? A. short order quantity B. refill unit quantity C. economic order quantity D. minimum stock level E. re-order limit

14. Allison has developed a set of procedures for determining the amount of each raw material that she needs to have in inventory if she is to keep her firm's assembly lines operating efficiently. These procedures are commonly referred to by which one of the following terms? A. first-in, first-out method B. the Baumol model C. net working capital planning D. economic order procedures E. materials requirements planning

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15. Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm? A. just-in-time inventory B. turnover planning C. net working capital planning D. inventory scoring E. inventory ranking

16. The terms of sale generally include which of the following? I. type of credit instrument II. cash discount III. credit period IV. discount period A. I and III only B. II and IV only C. III and IV only D. II, III, and IV only E. I, II, III, and IV

17. What is the primary purpose of credit analysis? A. determine the optimal credit period B. establish the effectiveness of granting a cash discount C. determine the optimal discount period, if any D. access the frequency and amount of sales by customer E. evaluate whether or not a customer will pay

18. The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period. A. float B. cash collection C. sales D. accounts receivable E. discount

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19. Which one of the following will increase a firm's investment in accounts receivables? A. a decrease in the number of days for which credit is granted B. a decrease in credit sales C. an increase in cash sales D. a decrease in the average collection period E. an increase in average daily credit sales

20. A firm's total investment in receivables depends primarily on the firm's: A. total sales and cash discount period. B. cash to credit sales ratio. C. bad debt ratio. D. average collection period and amount of credit sales. E. amount of credit sales and cash discount percentage.

21. Which one of the following time periods is included in the accounts receivable period but not in the cash collection period? A. the period of time between the receipt of a check and the availability of those funds B. time it takes a firm to process incoming receipts C. period of time a check is in the mail D. the amount of time that it takes a bank to credit a firm's account for a deposit made E. period of time it takes an invoice to reach a customer by mail

22. Which one of the following statements is correct if you purchase an item with credit terms of 1/5, net 15? A. If you pay within 1 day, you will receive a 5 percent discount. B. If you pay within 5 days, you will receive a 1 percent discount. C. If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate. D. If you pay within 15 days, you will receive a 1/5th percent discount. E. You must pay the discounted amount within 15 days.

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23. You are doing some comparison shopping. Five stores offer the product you want at basically the same price. Which one of the following stores offers the best credit terms if you plan on taking the discount?

A. store A B. store B C. store C D. store D E. store E

24. You are doing some comparison shopping. Five stores offer the product you want at basically the same price. Which one of the following stores offers the best credit terms if you plan to forego the discount?

A. store A B. store B C. store C D. store D E. store E

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25. Which one of the following statements is correct? A. The credit period begins when the discount period ends. B. The discount period is the length of time granted to a customer to pay for a purchase. C. The credit period begins on the invoice date. D. With terms of 2/10, net 30, the net credit period is 20 days. E. With EOM dating, all sales are assumed to have occurred on the 15th of each month.

26. Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer? I. seller's operating cycle II. customer's operating cycle III. seller's inventory period IV. customer's inventory period A. I and II B. II and III C. III and IV D. II and IV E. I and IV

27. Which one of the following factors tends to favor longer credit periods? A. high consumer demand B. lower priced merchandise C. increased credit risk D. merchandise with low collateral value E. increased competition

28. Which one of the following statements is correct in regards to credit periods? A. Perishable items tend to have longer credit periods. B. Items with low markups tend to have longer credit periods. C. Smaller accounts tend to have longer credit periods. D. Different customers may be offered different credit periods by the same firm. E. Newer products tend to have shorter credit periods.

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29. A cash discount of 2/5, net 30: A. grants customers 30 days to pay after the discount period expires. B. offers customers a maximum of 30 days credit. C. grants free credit for a period of 30 days. D. charges a higher price to a cash customer than to a customer who pays in 2 days. E. grants customers 2 days to pay if they want the 5 percent discount.

30. Under credit terms of 1/5, net 15, customers should: A. always pay on the 15th day. B. take the 5 percent discount and pay immediately. C. take the discount and pay on the day following the day of sale. D. either take the discount or pay on the 15th day. E. both take the discount and pay on the 15th day.

31. A 2/10, net 30 credit policy: A. is an expensive form of short-term credit if a buyer foregoes the discount. B. provides cheap financing to the buyer for 30 days. C. is an inexpensive means of reducing the seller's collection period if every customer takes the discount. D. tends to have little effect on the seller's collection period. E. tends to increase a firm's investment in receivables as compared to a straight net 30 policy.

32. The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume you purchase an item on credit from The Green Hornet on Monday, November 3. What is the invoice date for this purchase? A. November 3 B. November 5 C. November 7 D. November 8 E. November 30

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33. Which one of the following credit instruments is commonly used in international commerce? A. open account B. sight draft C. time draft D. banker's acceptance E. promissory note

34. A conditional sales contract: A. passes title to the goods sold to the buyer at the time the contract is signed. B. normally calls for one lump sum payment on the contract payment date. C. generally has a built-in interest cost. D. is payable immediately upon receipt. E. is a formal bid for a project.

35. Which of the following statements correctly reflect the effects of granting credit to customers? I. Total revenues may increase if both the quantity sold and the price per unit increase when credit is granted. II. A firm's cash cycle generally increases if credit is granted, all else equal. III. Both the cost of default and the cost of discounts must be considered before granting credit. IV. A firm may have to increase its long-term borrowing if it decides to grant credit to its customers. A. I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV

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36. You are considering switching from an all cash credit policy to a net 30 credit policy. You do not expect the switch to affect either your sales quantity or your sales price. Ignoring interest and assuming that every month has 30 days, your net present value of the switch will be equal to: A. zero. B. your selling price per unit. C. your selling price per unit multiplied by -1. D. your selling price per unit multiplied by -30. E. your total monthly sales multiplied by -1.

37. The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental: A. decrease in the cash cycle. B. benefit from decreasing the inventory level. C. cash flows from increased sales. D. increase in bad debts. E. gain in net profits.

38. When credit policy is at the optimal point, the: A. total costs of granting credit will be maximized. B. carrying costs of credit will be equal to zero. C. opportunity cost of credit will be equal to zero. D. carrying costs will equal the opportunity costs. E. total costs will equal the opportunity costs.

39. If you extend credit for a one-time sale to a new customer you risk an amount equal to: A. the sales price of the item sold. B. the variable cost of the item sold. C. the fixed cost of the item sold. D. the profit margin on the item sold. E. zero.

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40. Which one of the following statements is correct? A. If the majority of a firm's new customers become repeat customers then there is a strong argument against extending credit even if the default rate is low. B. A customer's past payment history reveals little information in relation to his or her future tendency to pay. C. A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase. D. The risk of issuing credit is the same for a new customer as it is for an existing customer. E. The recommended credit policy for new customers is to extend the maximum amount of credit you will ever be willing to offer as an enticement to get their business.

41. Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer? I. payment history with similar firms II. credit reports III. financial statements IV. information provided by a bank A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV

42. When evaluating the creditworthiness of a customer, the term character refers to the: A. nature of the cash flows of the customer's business. B. customer's financial resources. C. types of assets the customer wants to pledge as collateral. D. customer's willingness to pay bills in a timely fashion. E. nature of the customer's line of work.

43. Which one of the five Cs of credit refers to a firm's financial reserves? A. character B. capacity C. collateral D. conditions E. capital

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44. Which one of the five Cs of credit refers to the general economic situation in the customer's line of business? A. capacity B. character C. conditions D. capital E. collateral

45. Which one of the following statements is correct? A. An aging schedule helps identify those customers who are the most delinquent. B. The percentage of total receivables that falls within a certain time period on an aging schedule will remain constant over time even if the firm has seasonal sales. C. Normally firms call their delinquent customers prior to sending them a past due letter. D. A constant average collection period over a period of time is cause for concern. E. It is common practice when a customer files for bankruptcy to sell that customer's receivable at face value.

46. Which one of the following inventory items is probably the least liquid? A. plywood held in inventory by a home builder B. a wheel barrow held in inventory by a garden center C. a partially assembled interior for a new vehicle D. a set of tires owned by an automobile manufacturer E. a toy owned by a retail toy store

47. Which one of the following inventory items is probably the most liquid? A. a custom made set of kitchen cabinets B. metal cabinets for dishwashers C. wheat stored in a grain silo D. a customized drilling press E. a partially built modular home

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48. Which one of the following inventory-related costs is considered a shortage cost? A. storage costs B. insurance cost C. cost of safety reserves D. obsolescence cost E. opportunity cost of capital used for inventory purchases

49. The ABC approach to inventory management is based on the concept that: A. inventory should arrive just in time to be used. B. the inventory period should be constant for all inventory items. C. basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only. D. a small percentage of the inventory items probably represents a large percentage of the inventory cost. E. one-third of a year's inventory need should be on hand, another third should be on order, and the last third should not be ordered yet.

50. The EOQ model is designed to determine how much: A. total inventory a firm needs in any one year. B. total inventory costs will be for any one given year. C. inventory should be purchased at a time. D. inventory will be sold per day. E. a firm loses in sales per day when an inventory item is depleted.

51. At the optimal order quantity size, the: A. total cost of holding inventory is fully offset by the restocking costs. B. carrying costs are equal to zero. C. restocking costs are equal to zero. D. total costs equal the carrying costs. E. carrying costs equal the restocking costs.

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52. The EOQ model is designed to minimize: A. production costs. B. inventory obsolescence. C. the carrying costs of inventory. D. the costs of replenishing inventory. E. the total costs of holding inventory.

53. Which one of the following items is most likely a derived-demand inventory item? A. cereal ready to be bagged and shipped to stores B. tires held in inventory by an auto maker C. shoes on display in a retail store D. toys ready to be shipped to toy stores E. wheat harvested by a farmer

54. Inventory needs under a derived-demand inventory system are: A. primarily dependent upon the competitive demands placed on a firm's suppliers. B. based on the anticipated demand for the finished product. C. based on minimizing the cost of restocking inventory. D. held constant over time. E. determined by a kanban system.

55. A just-in-time inventory system: I. when implemented properly reduces the cost of inventory to zero. II. increases the inventory turnover rate. III. is sufficient to handle immediate production needs. IV. minimizes the costs of holding inventory. A. I and III only B. II and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

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56. The incremental investment in receivables under the accounts receivable approach is equal to: A. P - vQ′. B. PQ′. C. PQ + v(Q′ - Q). D. P(Q′ - Q). E. PQ(Q′ - Q).

57. The accounts receivable approach to credit policy supports the theory that: A. a firm's risk of offering credit to a new customer is limited to the variable cost of the sold items. B. the best credit policy is an all-cash policy. C. the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer. D. foregoing cash discounts is a method of obtaining inexpensive short-term financing. E. the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same.

58. Which two of the following are the key elements in determining whether or not a switch from a no-credit policy to a credit policy is advisable? I. variable cost per unit II. cash discount percentage III. credit price IV. default rate A. I and III only B. II and IV only C. II and III only D. I and IV only E. III and IV only

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59. On average, your firm sells $38,700 of items on credit each day. The firm's average operating cycle is 49 days and it acquires and sells inventory, on average, every 17 days. What is the average accounts receivable balance? A. $657,900 B. $848,000 C. $1,238,400 D. $1,315,500 E. $1,896,300

60. The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 1/10, net 25. What is the discounted price? A. $43,470 B. $46,209 C. $47,817 D. $47,929 E. $48,300

61. Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the payment to receive the discount? Note: October has 31 days. A. October 13 B. October 15 C. October 17 D. October 27 E. November 1

62. A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual rate of the discount if the firm purchases $4,600 worth of merchandise? A. 27.24 percent B. 27.86 percent C. 28.80 percent D. 29.03 percent E. 29.27 percent

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63. Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is $38. What is the incremental cash inflow from the proposed credit policy switch? A. $774 B. $2,625 C. $4,750 D. $5,690 E. $7,375

64. Polly's Home Accents currently sells 345 units a month at a price of $59 a unit. Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $32. What is the net present value of the proposed credit policy switch? A. $349,135 B. $350,895 C. $426,507 D. $621,929 E. $821,135

65. Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm believes it can increase its sales by an additional 40 units if it switches to a net 30 credit policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480. What is the net present value of the proposed credit policy switch? A. -$213,360 B. -$9,240 C. $190,200 D. $1,287,520 E. $1,768,680

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66. Currently, The Toy Box sells 465 units a month at an average price of $39 a unit. The company thinks it can increase sales by an additional 130 units a month if it switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $21. What is the incremental cash inflow of the proposed credit policy switch? A. $2,120 B. $2,340 C. $2,200 D. $2,730 E. $5,070

67. Preston Milled Products currently sells a product with a variable cost per unit of $21 and a unit selling price of $40. At the present time, the firm only sells on a cash basis with monthly sales of 2,800 units. The monthly interest rate is 0.5 percent. What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant. A. 2,830 units B. 2,910 units C. 3,333 units D. 3,414 units E. 3,526 units

68. Saucier & Co. currently sells 2,200 units a month for total monthly sales of $86,500. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent. What is the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant. A. 1,943 units B. 2,117 units C. 2,249 units D. 2,406 units E. 2,548 units

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69. The Cellar Door currently sells 9,620 units a month for total monthly sales of $316,000. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 percent. What is the switch break-even level of sales? A. 9,711 units B. 9,779 units C. 9,814 units D. 9,957 units E. 9,889 units

70. You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect there is a 15 percent chance this person will never pay you. The sales price of the item the customer wants to buy is $289. Your variable cost on that item is $156 and your monthly interest rate is 1.75 percent. Should you grant credit to this customer? Why or why not? A. yes; because the NPV of the potential sale is $113.05 B. yes; because the NPV of the potential sale is $85.43 C. no; because the NPV of the potential sale is -$133.00 D. no; because the NPV of the potential sale is -113.05 E. no; because the NPV of the potential sale is -$89.65

71. You are considering renting a kiosk in the local mall for a period of three months. Any sale you make will be a one-time sale. There is only a 79 percent chance you will collect payment on a credit sale. The product you want to sell has a variable cost of $3.88 and a sales price of $4.99. The monthly interest rate is 1.5 percent. Should you offer people 30 days to pay? Why or why not? A. yes; because the NPV of a credit sale is $0.09. B. yes; because the NPV of a credit sale is $0.03. C. no; because the NPV of a credit sale is -$0.08. D. no; because the NPV of a credit sale is -$0.02. E. It doesn't matter because the NPV of a credit sale is approximately zero.

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72. You are trying to attract new customers that you feel could become repeat customers. The average selling price of your products is $69 each with a $41 per unit variable cost. The monthly interest rate is 1.2 percent. Your experience tells you that 8 percent of these customers will never pay their bill. What is the value of a new customer who does not default on his or her bill? A. $1,986 B. $2,333 C. $2,617 D. $4,817 E. $8,867

73. You are trying to attract new customers that you feel could become repeat customers. The average price of your product is $619 per unit with a $435 variable cost per unit. The monthly interest rate is 1.8 percent. Your experience tells you that 9 percent of these customers will never pay their bill. Should you offer credit terms of net 30 to attract these potential customers? Why or why not? A. yes; because the NPV of extending credit is $8,867 B. yes; because the NPV of extending credit is $9,787 C. yes; because the NPV of extending credit is $128 D. no; because the NPV of extending credit is -$459 E. It doesn't matter because the NPV of extending credit is zero.

74. A firm sells 4,500 units of an item each year. The carrying cost per unit is $2.15 and the fixed costs per order are $67. What is the economic order quantity? A. 374 units B. 421 units C. 497 units D. 530 units E. 623 units

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75. The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic order quantity? A. 446 pairs B. 515 pairs C. 529 pairs D. 631 pairs E. 648 pairs

76. One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable cost per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells 7,100 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity? A. 690 units B. 747 units C. 975 units D. 1,157 units E. 1,260 units

77. Each year you sell 950 units of a product at a price of $899 each. The variable cost per unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units at a time. Your fixed cost of ordering is $60. What is the economic order quantity? A. 82 units B. 95 units C. 105 units D. 113 units E. 124 units

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78. Weisbrough United currently has a cash sales only policy. Under this policy, the firm sells 410 units a month at a price of $219 a unit. The variable cost per unit is $148 and the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy. What is the net present value of the switch using the one-shot approach? A. $228,400 B. $255,590 C. $261,470 D. $282,233 E. $285,902

79. Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a price of $469 each. The variable cost per unit is $305 and the monthly interest rate is 1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy. What is the net present value of the switch using the one-shot approach? A. $212,806 B. $231,543 C. $235,479 D. $248,946 E. $251,118

80. Under your current cash sales only policy you sell 132 units a month for a total sales value of $9,240. Your variable cost per unit is $44 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 22 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach? A. $45,976 B. $46,992 C. $49,081 D. $50,224 E. $53,566

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81. You are currently selling 72 units a month at a price of $210 a unit. Your variable cost of each unit is $130. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month. The monthly interest rate is 1.5 percent. What is the net present value of this proposed switch using the accounts receivable approach? A. $104,557 B. $114,829 C. $134,822 D. $136,516 E. $141,520

82. Your current sales consist of 27 units per month at a price of $225 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit. If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate. The monthly interest rate is 1.5 percent. What is the net present value of the proposed credit policy switch? A. $6,727 B. $6,893 C. $7,206 D. $7,965 E. $8,481

83. Your current sales consist of 45 units per month at a price of $390 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even default rate of the proposed switch? A. 3.55 percent B. 3.68 percent C. 4.29 percent D. 4.71 percent E. 4.88 percent

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Chapter 20 - Credit and Inventory Management Essay Questions

84. Which do you feel is the more appropriate upper limit for the credit period that a seller offers to a buyer: the buyer's operating cycle or the buyer's inventory period?

85. Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail chain consistently takes the 2 percent discount and pays in 60 days. When pressed on the issue, the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business. Is this ethical? How might this impact a small supplier versus a large supplier? Explain.

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86. Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?

87. All else equal, firms with (1) excess capacity, (2) low variable costs, and (3) repeat customers are more apt to offer liberal credit terms to their customers than are other firms. Explain why this tendency exists.

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Multiple Choice Questions

88. The Green Hornet sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,600 forecasts every month at a price of $1,100 each. What is the firm's average balance sheet amount in accounts receivable? A. $940,274 B. $1,408,272 C. $1,786,521 D. $1,811,012 E. $1,915,387

89. A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn when a customer does not take the discount? A. 18.67 percent B. 20.45 percent C. 23.37 percent D. 25.34 percent E. 25.92 percent

90. Music City, Inc. has an average collection period of 56 days. Its average daily investment in receivables is $50,000. What are the annual credit sales? A. $268,407 B. $307,109 C. $325,893 D. $728,215 E. $767,123

91. The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. Annual credit sales are $7 million. What is the company's balance sheet amount in accounts receivable? A. $690,411 B. $723,333 C. $851,667 D. $915,407 E. $923,593

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92. Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7 million per unit, and the credit price is $2.1 million each. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 240 such orders is never collected. The required return is 2.8 percent per period. What is the NPV per unit if this is a one-time order? A. $316,407 B. $328,819 C. $334,290 D. $342,802 E. $351,056

93. Quest, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be one month. The required return is 1.6 percent per month. Based on the following information, what is the NPV of the new policy?

A. $28,750 B. $32,500 C. $35,000 D. $38,250 E. $40,000

94. Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders another 2,100. The relevant carrying cost per switch assembly is $20, and the fixed order cost is $300. What is the EOQ? A. 1,279.84 B. 1,434.14 C. 1,809.97 D. 2,278.42 E. 2,698.15

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95. Roger's Store begins each week with 150 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $48 per year and the fixed order cost is $70. What is the optimal number of orders that should be placed each year? A. 48.69 B. 51.71 C. 54.20 D. 61.10 E. 64.50

96. The Dilana Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. What is the NPV of the new policy given the following information?

A. -$230,880 B. -$118,420 C. $311,508 D. $428,997 E. $566,840

97. The Cycle Shoppe has decided to offer credit to its customers during the spring selling season. Sales are expected to be 330 bicycles. The average cost to the shop of a bicycle is $300. The owner knows that only 93 percent of the customers will be able to make their payments. To identify the remaining 7 percent, she is considering subscribing to a credit agency. The initial charge for this service is $540, with an additional charge of $6 per individual report. What is the amount of the net savings from subscribing to the credit agency? A. $3,790 B. $3,920 C. $4,080 D. $4,410 E. $4,950

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Chapter 20 Credit and Inventory Management Answer Key

Multiple Choice Questions

1. Blackwell Brothers sells men's suits. The store offers a 1 percent discount if payment is received within 10 days. Otherwise, payment is due within 30 days. This credit offering is referred to as the: A. terms of sale. B. credit analysis. C. collection policy. D. payables policy. E. collection float. Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Terms of sale

2. Jillian was recently hired by a major retail store. Her job is to determine the probability that individual customers will fail to pay for their charge sales. Jillian's job best relates to which one of the following? A. terms of sale B. credit analysis C. collection policy D. payables policy E. customer service Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Credit analysis

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3. Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's: A. customer service policy. B. credit policy. C. collection policy. D. payables policy. E. disbursements policy. Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Collection policy

4. Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service. This 30-day period is referred to as the: A. payables period. B. cash cycle. C. transactions period. D. credit period. E. disbursement period. Refer to section 20.2

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Credit period

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5. Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill? A. ledger statement B. warranty C. indenture D. receipt E. invoice Refer to section 20.2

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Invoice

6. Geoff Industries offers its credit customers a 2 percent discount if they pay within 10 days. This discount is referred to as a: A. cash discount. B. purchase discount. C. collection discount. D. market discount. E. receivables discount. Refer to section 20.2

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Cash discounts

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7. Any written proof that a customer owes you money for goods or services provided is referred to as a(n): A. account document. B. sales draft. C. credit instrument. D. commercial paper. E. letter of debt. Refer to section 20.2

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Credit instruments

8. You are viewing a graph which compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs? A. opportunity cost curve B. credit extension curve C. credit cost curve D. terms of sale graph E. optimal sales graph Refer to section 20.4

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.4 Topic: Credit cost curve

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9. Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF? A. credit department B. parent company C. captive finance company D. credit union E. service unit Refer to section 20.4

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.4 Topic: Captive finance company

10. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are: A. conditions, control, cessation, capital, and capacity. B. conditions, character, capital, control, and capacity. C. capital, collateral, control, character, and capacity. D. character, capacity, control, cessation, and collateral. E. character, capacity, capital, collateral, and conditions. Refer to section 20.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Five Cs of credit

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11. Roger's Home Appliances offers credit to customers it deems worthy of this privilege. To determine if a customer is worthy, the firm computes a numerical value which is used to estimate the probability that the customer will default if credit is granted to them. The process of computing this numerical value is referred to as: A. credit scoring. B. credit capacity. C. receipts assessment. D. conditions for credit. E. consumer analysis. Refer to section 20.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Credit scoring

12. You have recently been hired as an accounting intern for Jefferson Mills. The job that you have been assigned for today is to compile a spreadsheet that has six columns. The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days. You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today. Once you have completed that, you are to sort the report by customer name and then total the amounts listed in each column. What is this report called? A. credit report B. aging schedule C. risk assessment report D. turnover delineation E. receivables consolidation report Refer to section 20.6

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.6 Topic: Aging schedule

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13. Bill is in charge of the inventory for Home Builder's Supply. As an inventory item gets low, he is to restock the item by a quantity that minimizes the total inventory costs for that item. What is this restocking quantity called? A. short order quantity B. refill unit quantity C. economic order quantity D. minimum stock level E. re-order limit Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic reorder quantity

14. Allison has developed a set of procedures for determining the amount of each raw material that she needs to have in inventory if she is to keep her firm's assembly lines operating efficiently. These procedures are commonly referred to by which one of the following terms? A. first-in, first-out method B. the Baumol model C. net working capital planning D. economic order procedures E. materials requirements planning Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Materials requirements planning

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15. Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm? A. just-in-time inventory B. turnover planning C. net working capital planning D. inventory scoring E. inventory ranking Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Just-In-Time inventory

16. The terms of sale generally include which of the following? I. type of credit instrument II. cash discount III. credit period IV. discount period A. I and III only B. II and IV only C. III and IV only D. II, III, and IV only E. I, II, III, and IV Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Terms of sale

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17. What is the primary purpose of credit analysis? A. determine the optimal credit period B. establish the effectiveness of granting a cash discount C. determine the optimal discount period, if any D. access the frequency and amount of sales by customer E. evaluate whether or not a customer will pay Refer to section 20.1


18. The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period. A. float B. cash collection C. sales D. accounts receivable E. discount Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Accounts receivable period

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19. Which one of the following will increase a firm's investment in accounts receivables? A. a decrease in the number of days for which credit is granted B. a decrease in credit sales C. an increase in cash sales D. a decrease in the average collection period E. an increase in average daily credit sales Refer to section 20.1

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Investment in receivables

20. A firm's total investment in receivables depends primarily on the firm's: A. total sales and cash discount period. B. cash to credit sales ratio. C. bad debt ratio. D. average collection period and amount of credit sales. E. amount of credit sales and cash discount percentage. Refer to section 20.1

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Investment in receivables

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21. Which one of the following time periods is included in the accounts receivable period but not in the cash collection period? A. the period of time between the receipt of a check and the availability of those funds B. time it takes a firm to process incoming receipts C. period of time a check is in the mail D. the amount of time that it takes a bank to credit a firm's account for a deposit made E. period of time it takes an invoice to reach a customer by mail Refer to section 20.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Investment in receivables

22. Which one of the following statements is correct if you purchase an item with credit terms of 1/5, net 15? A. If you pay within 1 day, you will receive a 5 percent discount. B. If you pay within 5 days, you will receive a 1 percent discount. C. If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate. D. If you pay within 15 days, you will receive a 1/5th percent discount. E. You must pay the discounted amount within 15 days. Refer to section 20.2

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Terms of sale

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23. You are doing some comparison shopping. Five stores offer the product you want at basically the same price. Which one of the following stores offers the best credit terms if you plan on taking the discount?

A. store A B. store B C. store C D. store D E. store E Refer to section 20.2


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24. You are doing some comparison shopping. Five stores offer the product you want at basically the same price. Which one of the following stores offers the best credit terms if you plan to forego the discount?

A. store A B. store B C. store C D. store D E. store E Refer to section 20.2


25. Which one of the following statements is correct? A. The credit period begins when the discount period ends. B. The discount period is the length of time granted to a customer to pay for a purchase. C. The credit period begins on the invoice date. D. With terms of 2/10, net 30, the net credit period is 20 days. E. With EOM dating, all sales are assumed to have occurred on the 15th of each month. Refer to section 20.2


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26. Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer? I. seller's operating cycle II. customer's operating cycle III. seller's inventory period IV. customer's inventory period A. I and II B. II and III C. III and IV D. II and IV E. I and IV Refer to section 20.2


27. Which one of the following factors tends to favor longer credit periods? A. high consumer demand B. lower priced merchandise C. increased credit risk D. merchandise with low collateral value E. increased competition Refer to section 20.2


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28. Which one of the following statements is correct in regards to credit periods? A. Perishable items tend to have longer credit periods. B. Items with low markups tend to have longer credit periods. C. Smaller accounts tend to have longer credit periods. D. Different customers may be offered different credit periods by the same firm. E. Newer products tend to have shorter credit periods. Refer to section 20.2


29. A cash discount of 2/5, net 30: A. grants customers 30 days to pay after the discount period expires. B. offers customers a maximum of 30 days credit. C. grants free credit for a period of 30 days. D. charges a higher price to a cash customer than to a customer who pays in 2 days. E. grants customers 2 days to pay if they want the 5 percent discount. Refer to section 20.2

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Cash discounts

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30. Under credit terms of 1/5, net 15, customers should: A. always pay on the 15th day. B. take the 5 percent discount and pay immediately. C. take the discount and pay on the day following the day of sale. D. either take the discount or pay on the 15th day. E. both take the discount and pay on the 15th day. Refer to section 20.2

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Cash discounts

31. A 2/10, net 30 credit policy: A. is an expensive form of short-term credit if a buyer foregoes the discount. B. provides cheap financing to the buyer for 30 days. C. is an inexpensive means of reducing the seller's collection period if every customer takes the discount. D. tends to have little effect on the seller's collection period. E. tends to increase a firm's investment in receivables as compared to a straight net 30 policy. Refer to section 20.2

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Cost of credit

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32. The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume you purchase an item on credit from The Green Hornet on Monday, November 3. What is the invoice date for this purchase? A. November 3 B. November 5 C. November 7 D. November 8 E. November 30 Refer to section 20.2

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Trade discount

33. Which one of the following credit instruments is commonly used in international commerce? A. open account B. sight draft C. time draft D. banker's acceptance E. promissory note Refer to section 20.2


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34. A conditional sales contract: A. passes title to the goods sold to the buyer at the time the contract is signed. B. normally calls for one lump sum payment on the contract payment date. C. generally has a built-in interest cost. D. is payable immediately upon receipt. E. is a formal bid for a project. Refer to section 20.2


35. Which of the following statements correctly reflect the effects of granting credit to customers? I. Total revenues may increase if both the quantity sold and the price per unit increase when credit is granted. II. A firm's cash cycle generally increases if credit is granted, all else equal. III. Both the cost of default and the cost of discounts must be considered before granting credit. IV. A firm may have to increase its long-term borrowing if it decides to grant credit to its customers. A. I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV Refer to section 20.3

AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 20-2 Section: 20.3 Topic: Credit policy effects

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36. You are considering switching from an all cash credit policy to a net 30 credit policy. You do not expect the switch to affect either your sales quantity or your sales price. Ignoring interest and assuming that every month has 30 days, your net present value of the switch will be equal to: A. zero. B. your selling price per unit. C. your selling price per unit multiplied by -1. D. your selling price per unit multiplied by -30. E. your total monthly sales multiplied by -1. Refer to section 20.3

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.3 Topic: Evaluating credit policy

37. The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental: A. decrease in the cash cycle. B. benefit from decreasing the inventory level. C. cash flows from increased sales. D. increase in bad debts. E. gain in net profits. Refer to section 20.4

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.4 Topic: Optimal amount of credit

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38. When credit policy is at the optimal point, the: A. total costs of granting credit will be maximized. B. carrying costs of credit will be equal to zero. C. opportunity cost of credit will be equal to zero. D. carrying costs will equal the opportunity costs. E. total costs will equal the opportunity costs. Refer to section 20.4

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.4 Topic: Optimal credit policy

39. If you extend credit for a one-time sale to a new customer you risk an amount equal to: A. the sales price of the item sold. B. the variable cost of the item sold. C. the fixed cost of the item sold. D. the profit margin on the item sold. E. zero. Refer to section 20.5


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40. Which one of the following statements is correct? A. If the majority of a firm's new customers become repeat customers then there is a strong argument against extending credit even if the default rate is low. B. A customer's past payment history reveals little information in relation to his or her future tendency to pay. C. A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase. D. The risk of issuing credit is the same for a new customer as it is for an existing customer. E. The recommended credit policy for new customers is to extend the maximum amount of credit you will ever be willing to offer as an enticement to get their business. Refer to section 20.5


41. Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer? I. payment history with similar firms II. credit reports III. financial statements IV. information provided by a bank A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV Refer to section 20.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Credit information

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42. When evaluating the creditworthiness of a customer, the term character refers to the: A. nature of the cash flows of the customer's business. B. customer's financial resources. C. types of assets the customer wants to pledge as collateral. D. customer's willingness to pay bills in a timely fashion. E. nature of the customer's line of work. Refer to section 20.5


43. Which one of the five Cs of credit refers to a firm's financial reserves? A. character B. capacity C. collateral D. conditions E. capital Refer to section 20.5


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44. Which one of the five Cs of credit refers to the general economic situation in the customer's line of business? A. capacity B. character C. conditions D. capital E. collateral Refer to section 20.5


45. Which one of the following statements is correct? A. An aging schedule helps identify those customers who are the most delinquent. B. The percentage of total receivables that falls within a certain time period on an aging schedule will remain constant over time even if the firm has seasonal sales. C. Normally firms call their delinquent customers prior to sending them a past due letter. D. A constant average collection period over a period of time is cause for concern. E. It is common practice when a customer files for bankruptcy to sell that customer's receivable at face value. Refer to section 20.6

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.6 Topic: Collection policy

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46. Which one of the following inventory items is probably the least liquid? A. plywood held in inventory by a home builder B. a wheel barrow held in inventory by a garden center C. a partially assembled interior for a new vehicle D. a set of tires owned by an automobile manufacturer E. a toy owned by a retail toy store Refer to section 20.7

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-3 Section: 20.7 Topic: Inventory types

47. Which one of the following inventory items is probably the most liquid? A. a custom made set of kitchen cabinets B. metal cabinets for dishwashers C. wheat stored in a grain silo D. a customized drilling press E. a partially built modular home Refer to section 20.7

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-3 Section: 20.7 Topic: Inventory types

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48. Which one of the following inventory-related costs is considered a shortage cost? A. storage costs B. insurance cost C. cost of safety reserves D. obsolescence cost E. opportunity cost of capital used for inventory purchases Refer to section 20.7

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-4 Section: 20.7 Topic: Inventory costs

49. The ABC approach to inventory management is based on the concept that: A. inventory should arrive just in time to be used. B. the inventory period should be constant for all inventory items. C. basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only. D. a small percentage of the inventory items probably represents a large percentage of the inventory cost. E. one-third of a year's inventory need should be on hand, another third should be on order, and the last third should not be ordered yet. Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-3 Section: 20.8 Topic: Inventory management techniques

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50. The EOQ model is designed to determine how much: A. total inventory a firm needs in any one year. B. total inventory costs will be for any one given year. C. inventory should be purchased at a time. D. inventory will be sold per day. E. a firm loses in sales per day when an inventory item is depleted. Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity

51. At the optimal order quantity size, the: A. total cost of holding inventory is fully offset by the restocking costs. B. carrying costs are equal to zero. C. restocking costs are equal to zero. D. total costs equal the carrying costs. E. carrying costs equal the restocking costs. Refer to section 20.8


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52. The EOQ model is designed to minimize: A. production costs. B. inventory obsolescence. C. the carrying costs of inventory. D. the costs of replenishing inventory. E. the total costs of holding inventory. Refer to section 20.8


53. Which one of the following items is most likely a derived-demand inventory item? A. cereal ready to be bagged and shipped to stores B. tires held in inventory by an auto maker C. shoes on display in a retail store D. toys ready to be shipped to toy stores E. wheat harvested by a farmer Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-3 Section: 20.8 Topic: Derived-demand inventory

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54. Inventory needs under a derived-demand inventory system are: A. primarily dependent upon the competitive demands placed on a firm's suppliers. B. based on the anticipated demand for the finished product. C. based on minimizing the cost of restocking inventory. D. held constant over time. E. determined by a kanban system. Refer to section 20.8

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-3 Section: 20.8 Topic: Derived-demand inventory

55. A just-in-time inventory system: I. when implemented properly reduces the cost of inventory to zero. II. increases the inventory turnover rate. III. is sufficient to handle immediate production needs. IV. minimizes the costs of holding inventory. A. I and III only B. II and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV Refer to section 20.8

AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 20-3 Section: 20.8 Topic: Just-In-Time inventory

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56. The incremental investment in receivables under the accounts receivable approach is equal to: A. P - vQ′. B. PQ′. C. PQ + v(Q′ - Q). D. P(Q′ - Q). E. PQ(Q′ - Q). Refer to section 20.A

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach

57. The accounts receivable approach to credit policy supports the theory that: A. a firm's risk of offering credit to a new customer is limited to the variable cost of the sold items. B. the best credit policy is an all-cash policy. C. the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer. D. foregoing cash discounts is a method of obtaining inexpensive short-term financing. E. the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same. Refer to section 20.A

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach

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58. Which two of the following are the key elements in determining whether or not a switch from a no-credit policy to a credit policy is advisable? I. variable cost per unit II. cash discount percentage III. credit price IV. default rate A. I and III only B. II and IV only C. II and III only D. I and IV only E. III and IV only Refer to section 20.A

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 20-2 Section: 20.A Topic: NPV of switch

59. On average, your firm sells $38,700 of items on credit each day. The firm's average operating cycle is 49 days and it acquires and sells inventory, on average, every 17 days. What is the average accounts receivable balance? A. $657,900 B. $848,000 C. $1,238,400 D. $1,315,500 E. $1,896,300 Accounts receivable balance = $38,700 × (49 - 17) = $1,238,400

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-1 Section: 20.1 Topic: Accounts receivable balance

20-59


60. The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 1/10, net 25. What is the discounted price? A. $43,470 B. $46,209 C. $47,817 D. $47,929 E. $48,300 Discounted price = $48,300 × (1 - 0.01) = $47,817

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-1 Section: 20.2 Topic: Accounts receivable discount

61. Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the payment to receive the discount? Note: October has 31 days. A. October 13 B. October 15 C. October 17 D. October 27 E. November 1 End of discount period = October 12 + 5 days = October 17


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62. A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual rate of the discount if the firm purchases $4,600 worth of merchandise? A. 27.24 percent B. 27.86 percent C. 28.80 percent D. 29.03 percent E. 29.27 percent Days in period = 40 - 10 = 30; Periods per year = 365/30 = 12.166667 Interest rate for 30 days = [0.02 × $4,600]/[(1 - 0.02) × $4,600] = 0.020408 Effective annual rate = (1 + .020408)12.166667 - 1 = 27.86 percent


63. Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is $38. What is the incremental cash inflow from the proposed credit policy switch? A. $774 B. $2,625 C. $4,750 D. $5,690 E. $7,375 Incremental cash flow = ($59 - $38) (125) = $2,625

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.3 Topic: Credit policy switch

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64. Polly's Home Accents currently sells 345 units a month at a price of $59 a unit. Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $32. What is the net present value of the proposed credit policy switch? A. $349,135 B. $350,895 C. $426,507 D. $621,929 E. $821,135 NPV of switch = - [($59 × 345) + ($32 × 55)] + [($59 - $32) × 55]/0.004 = $349,135

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.3 Topic: Credit policy switch

65. Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm believes it can increase its sales by an additional 40 units if it switches to a net 30 credit policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480. What is the net present value of the proposed credit policy switch? A. -$213,360 B. -$9,240 C. $190,200 D. $1,287,520 E. $1,768,680 NPV = - [($729 × 280) + ($480 × 40)] + [($729 - $480) × 40]/0.005 = $1,768,680

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.3 Topic: Credit policy switch

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66. Currently, The Toy Box sells 465 units a month at an average price of $39 a unit. The company thinks it can increase sales by an additional 130 units a month if it switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $21. What is the incremental cash inflow of the proposed credit policy switch? A. $2,120 B. $2,340 C. $2,200 D. $2,730 E. $5,070 Incremental cash flow = ($39 - $21) (130) = $2,340

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.3 Topic: Credit policy switch

67. Preston Milled Products currently sells a product with a variable cost per unit of $21 and a unit selling price of $40. At the present time, the firm only sells on a cash basis with monthly sales of 2,800 units. The monthly interest rate is 0.5 percent. What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant. A. 2,830 units B. 2,910 units C. 3,333 units D. 3,414 units E. 3,526 units Break-even point = Q′ - 2,800 = ($40 × 2,800)/{[($40 - $21)/0.005] - $21} = 30 units Q′ = 2,800 + 30 = 2,830 units

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-3 Section: 20.3 Topic: Switch break-even point

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68. Saucier & Co. currently sells 2,200 units a month for total monthly sales of $86,500. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent. What is the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant. A. 1,943 units B. 2,117 units C. 2,249 units D. 2,406 units E. 2,548 units Break-even point = Q′ - 2,200 = ($86,500)/{[(($86,500/2,200) - $18)/0.012] - $18} = 49 units; Q′ = 2,200 + 49 = 2,249 units


69. The Cellar Door currently sells 9,620 units a month for total monthly sales of $316,000. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 percent. What is the switch break-even level of sales? A. 9,711 units B. 9,779 units C. 9,814 units D. 9,957 units E. 9,889 units Break-even point = Q′ - 9,620 = ($316,000)/{[(($316,000/9,620) - $15)/0.015] - $15} = 269 units; Q′ = 9,620 + 269 = 9,889 units


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70. You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect there is a 15 percent chance this person will never pay you. The sales price of the item the customer wants to buy is $289. Your variable cost on that item is $156 and your monthly interest rate is 1.75 percent. Should you grant credit to this customer? Why or why not? A. yes; because the NPV of the potential sale is $113.05 B. yes; because the NPV of the potential sale is $85.43 C. no; because the NPV of the potential sale is -$133.00 D. no; because the NPV of the potential sale is -113.05 E. no; because the NPV of the potential sale is -$89.65 NPV = -$156 + {[1 - 0.15] × [$289/(1 + 0.0175)]} = $85.43

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: One-time sale

71. You are considering renting a kiosk in the local mall for a period of three months. Any sale you make will be a one-time sale. There is only a 79 percent chance you will collect payment on a credit sale. The product you want to sell has a variable cost of $3.88 and a sales price of $4.99. The monthly interest rate is 1.5 percent. Should you offer people 30 days to pay? Why or why not? A. yes; because the NPV of a credit sale is $0.09. B. yes; because the NPV of a credit sale is $0.03. C. no; because the NPV of a credit sale is -$0.08. D. no; because the NPV of a credit sale is -$0.02. E. It doesn't matter because the NPV of a credit sale is approximately zero. NPV = -$3.88 + {0.79 × [$4.99/(1 + 0.015)]} = $0

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: One-time sale

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72. You are trying to attract new customers that you feel could become repeat customers. The average selling price of your products is $69 each with a $41 per unit variable cost. The monthly interest rate is 1.2 percent. Your experience tells you that 8 percent of these customers will never pay their bill. What is the value of a new customer who does not default on his or her bill? A. $1,986 B. $2,333 C. $2,617 D. $4,817 E. $8,867 PV = ($69 - $41)/0.012 = $2,333

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Repeat sale

73. You are trying to attract new customers that you feel could become repeat customers. The average price of your product is $619 per unit with a $435 variable cost per unit. The monthly interest rate is 1.8 percent. Your experience tells you that 9 percent of these customers will never pay their bill. Should you offer credit terms of net 30 to attract these potential customers? Why or why not? A. yes; because the NPV of extending credit is $8,867 B. yes; because the NPV of extending credit is $9,787 C. yes; because the NPV of extending credit is $128 D. no; because the NPV of extending credit is -$459 E. It doesn't matter because the NPV of extending credit is zero. NPV = -$435 + {[1 - 0.9] × [($619 - $435)/0.018]} = $8,867

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Repeat sale

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74. A firm sells 4,500 units of an item each year. The carrying cost per unit is $2.15 and the fixed costs per order are $67. What is the economic order quantity? A. 374 units B. 421 units C. 497 units D. 530 units E. 623 units EOQ = [(2 × 4,500 × $67)/$2.15]1/2 = 530 units

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity

75. The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic order quantity? A. 446 pairs B. 515 pairs C. 529 pairs D. 631 pairs E. 648 pairs EOQ = [(2 × 5,700 × $68)/$1.95]1/2 = 631 pairs


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76. One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable cost per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells 7,100 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity? A. 690 units B. 747 units C. 975 units D. 1,157 units E. 1,260 units EOQ = [(2 × 7,100 × $75)/$1.12]1/2 = 975 units


77. Each year you sell 950 units of a product at a price of $899 each. The variable cost per unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units at a time. Your fixed cost of ordering is $60. What is the economic order quantity? A. 82 units B. 95 units C. 105 units D. 113 units E. 124 units EOQ = [(2 × 950 × $60)/$16.90]1/2 = 82 units


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78. Weisbrough United currently has a cash sales only policy. Under this policy, the firm sells 410 units a month at a price of $219 a unit. The variable cost per unit is $148 and the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy. What is the net present value of the switch using the one-shot approach? A. $228,400 B. $255,590 C. $261,470 D. $282,233 E. $285,902 Monthly benefit = [($219 × 475)/1.013] - [$148 × 475] - [($219 - $148) × 410] = $3,280.03; NPV of switch = $3,280.03 + ($3,280.03/0.013) = $255,590

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: One-shot approach

79. Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a price of $469 each. The variable cost per unit is $305 and the monthly interest rate is 1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy. What is the net present value of the switch using the one-shot approach? A. $212,806 B. $231,543 C. $235,479 D. $248,946 E. $251,118 Monthly benefit = {[$469 × (215 + 36)]/(1 + 0.017)} - {$305 × (215 + 36)} - {($469 - $305) × 215} = $3,936.23; NPV of switch = $3,936.23 + ($3,936.23/0.017) = $235,479

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: One-shot approach

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80. Under your current cash sales only policy you sell 132 units a month for a total sales value of $9,240. Your variable cost per unit is $44 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 22 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach? A. $45,976 B. $46,992 C. $49,081 D. $50,224 E. $53,566 P = $9,240/132 = $70

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach

81. You are currently selling 72 units a month at a price of $210 a unit. Your variable cost of each unit is $130. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month. The monthly interest rate is 1.5 percent. What is the net present value of this proposed switch using the accounts receivable approach? A. $104,557 B. $114,829 C. $134,822 D. $136,516 E. $141,520

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach

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82. Your current sales consist of 27 units per month at a price of $225 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit. If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate. The monthly interest rate is 1.5 percent. What is the net present value of the proposed credit policy switch? A. $6,727 B. $6,893 C. $7,206 D. $7,965 E. $8,481 d = ($240 - $225)/$240 = 0.0625 NPV = - ($225 × 27) + {($240 × 27) × [(0.0625 - 0.03)/0.015]} = $7,965

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Discounts and default risk

83. Your current sales consist of 45 units per month at a price of $390 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even default rate of the proposed switch? A. 3.55 percent B. 3.68 percent C. 4.29 percent D. 4.71 percent E. 4.88 percent d = ($410 - $390)/$410 = 0.048780488 π = 0.048780488 - 0.014 (1 - 0.048780488) = 3.55 percent

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Discounts and default risk

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Chapter 20 - Credit and Inventory Management Essay Questions

84. Which do you feel is the more appropriate upper limit for the credit period that a seller offers to a buyer: the buyer's operating cycle or the buyer's inventory period? The operating cycle is the sum of the inventory and accounts receivable periods. The inventory period is probably the better target as an upper limit for the seller's credit period since it is questionable whether or not the seller should be financing the buyer's receivables. The credit period should definitely not exceed the buyer's operating period as the seller would then be financing all of the buyer's inventory and accounts receivables, plus other aspects of the buyer's operations. Feedback: Refer to section 20.2

AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.2 Topic: Length of credit period

85. Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail chain consistently takes the 2 percent discount and pays in 60 days. When pressed on the issue, the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business. Is this ethical? How might this impact a small supplier versus a large supplier? Explain. This question can lead to a lively discussion about the ethics of abusing the credit period. Some students will argue that it is unethical for the large firm to exercise its will against its suppliers. Most would argue that a supplier that is also a relatively large firm will better be able to negotiate with the retail chain and work out a more favorable arrangement than the current situation. If a supplier is small, this account may be a significant proportion of the supplier's total sales. In that case, the supplier may have no choice other than accepting the terms as dictated by the retail chain or going out of business. Whether or not the actions of the retail chain are ethical is debatable, but this practice occurs fairly frequently. Feedback: Refer to section 20.2

AACSB: Reflective thinking and Ethics Bloom's: Evaluation Difficulty: Intermediate Learning Objective: 20-2 Section: 20.2 Topic: Ethics and the credit period

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86. Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts? Firms will forego discounts when there is insufficient cash flow to pay within the discount period. It would be difficult to argue that this type of financing, given the typically high cost of foregoing the discount, would be cheaper than other financing sources available to the firm. However, it might be more desirable than raising cash, say through secured inventory financing or factoring receivables. As far as correcting the problem, the firm's management needs to seriously review the firm's cash and liquidity policies and make the changes required to improve the firm's liquidity and cash flow situation. Feedback: Refer to section 20.2

AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-1 Section: 20.2 Topic: Discounts

87. All else equal, firms with (1) excess capacity, (2) low variable costs, and (3) repeat customers are more apt to offer liberal credit terms to their customers than are other firms. Explain why this tendency exists. Firms with excess capacity are more apt to offer liberal credit terms as a sales incentive as increased sales will also increase the capacity utilization ratio. Firms with low variable costs extend credit more liberally as the cost to do so is limited to the variable cost of the items sold. Finally, firms with repeat customers gain familiarity with its customers' ability to pay, thereby facilitating more liberal credit terms. Feedback: Refer to section 20.5

AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.5 Topic: Liberal credit terms

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Chapter 20 - Credit and Inventory Management Multiple Choice Questions

88. The Green Hornet sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,600 forecasts every month at a price of $1,100 each. What is the firm's average balance sheet amount in accounts receivable? A. $940,274 B. $1,408,272 C. $1,786,521 D. $1,811,012 E. $1,915,387 Average collection period = 0.55(10 days) + 0.45 (30 days) = 19 days Average A/R = 2,600 ($1,100) (12/365) (19) = $1,786,521

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-3 Learning Objective: 20-1 Section: 20.2 Topic: Accounts receivable

89. A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn when a customer does not take the discount? A. 18.67 percent B. 20.45 percent C. 23.37 percent D. 25.34 percent E. 25.92 percent EAR = [1 + (0.02/0.98)]365/(41 - 9) - 1 = 25.92 percent

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-5 Learning Objective: 20-1 Section: 20.2 Topic: Terms of sale

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90. Music City, Inc. has an average collection period of 56 days. Its average daily investment in receivables is $50,000. What are the annual credit sales? A. $268,407 B. $307,109 C. $325,893 D. $728,215 E. $767,123 Annual credit sales = $50,000 (365/56) = $325,893

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-6 Learning Objective: 20-1 Section: 20.1 Topic: Receivables turnover

91. The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. Annual credit sales are $7 million. What is the company's balance sheet amount in accounts receivable? A. $690,411 B. $723,333 C. $851,667 D. $915,407 E. $923,593 A/R = $7,000,000 [(30 + 6)/365] = $690,411

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-8 Learning Objective: 20-1 Section: 20.1 Topic: Accounts receivable

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92. Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7 million per unit, and the credit price is $2.1 million each. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 240 such orders is never collected. The required return is 2.8 percent per period. What is the NPV per unit if this is a one-time order? A. $316,407 B. $328,819 C. $334,290 D. $342,802 E. $351,056 NPV = -$1,700,000 + [1 - (1/240)] [$2,100,000]/(1 + 0.028) = $334,290

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-9 Learning Objective: 20-1 Section: 20.3 Topic: Credit policy

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93. Quest, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be one month. The required return is 1.6 percent per month. Based on the following information, what is the NPV of the new policy?

A. $28,750 B. $32,500 C. $35,000 D. $38,250 E. $40,000 Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000 Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000 New policy NPV = $15,000/0.016 - $905,000 = $32,500

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-10 Learning Objective: 20-2 Section: 20.3 Topic: Credit policy evaluation

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94. Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders another 2,100. The relevant carrying cost per switch assembly is $20, and the fixed order cost is $300. What is the EOQ? A. 1,279.84 B. 1,434.14 C. 1,809.97 D. 2,278.42 E. 2,698.15 EOQ = [(2 × 52 × 2,100 × 300)/$20]½ = 1,809.97

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-11 Learning Objective: 20-4 Section: 20.8 Topic: EOQ

95. Roger's Store begins each week with 150 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $48 per year and the fixed order cost is $70. What is the optimal number of orders that should be placed each year? A. 48.69 B. 51.71 C. 54.20 D. 61.10 E. 64.50 EOQ = [(2 × 52 × 150 × $70)/$48]1/2 = 150.83 Number of orders per year = 52(150)/150.83 = 51.71

AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-12 Learning Objective: 20-4 Section: 20.8 Topic: Optimal order quantity

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96. The Dilana Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. What is the NPV of the new policy given the following information?

A. -$230,880 B. -$118,420 C. $311,508 D. $428,997 E. $566,840 Cash flow from old policy = ($70 - $36) (3,500) = $119,000 Cash flow from new policy = ($74 - $36) (3,560) = $135,280 Incremental cash flow = $135,280 - $119,000 = $16,280 NPV of new policy = - [$70(3,500) + $36(3,560 - 3,500)] + $16,280/0.02 = $566,840

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 20-14 Learning Objective: 20-2 Section: 20.5 Topic: Credit policy

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97. The Cycle Shoppe has decided to offer credit to its customers during the spring selling season. Sales are expected to be 330 bicycles. The average cost to the shop of a bicycle is $300. The owner knows that only 93 percent of the customers will be able to make their payments. To identify the remaining 7 percent, she is considering subscribing to a credit agency. The initial charge for this service is $540, with an additional charge of $6 per individual report. What is the amount of the net savings from subscribing to the credit agency? A. $3,790 B. $3,920 C. $4,080 D. $4,410 E. $4,950 Net savings = (330 × $300 × 0.07) - $540 - (330 × $6) = $4,410

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 20-16 Learning Objective: 20-2 Section: 20.5 Topic: Credit policy

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Chap 020

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