07_CASH, RECEIVABLES, INVENTORY MANAGMENT

PROBLEMS

CASH MANAGEMENT

1. Ever Corporation has 100,000 shares outstanding. Below is a portion of Ever's balance sheet
as of December 31, 2019

Cash 455,000 Accrued liabilities 285,000

Accounts receivable 900,000 Accounts Payable 550,000
Inventories 650,000 Current portion of 65,000
long term notes
Prepaid expenses 45,000
payable

What is the maximum amount Ever can pay in cash dividends per share and maintain a
minimum current ratio of 2 to 1? Assume that all accounts other than cash remain
unchanged.
__________

2. A firm has daily cash receipts of P100,000 and collection time of 20 days. A bank has offered
to reduce the collection time on the firm's deposits by 2 days for a monthly fee of P500. If money
market rates are expected to average 6% during the year, the net annual benefit (loss) from
having this service is __

3. Clover Masks and Costumes Inc. (CMC) has a majority of its customers located in the cities of
Manila and Cebu. Prime National Bank has agreed to provide a lockbox system to CMC at a
fixed fee of P50,000 per year and a variable fee of P 0.50 for each payment processed by the
bank. On average, CMC receives 50 payments per day, each averaging P20,000. With the
lockbox system, the company's collection float will decrease by 2 days. The annual interest rate
on money market securities is 6%. If CMC makes use of the lockbox system, what would be the
net benefit to the company? Use 365 days per year. __________
4. Assume that each day a company writes and receives checks totaling P 10,000. If it takes
5 days for the checks to clear and be deducted from the company's account, and only 4 days
for the deposits to clear, what is the net float?

5. Assume that the fixed cost of selling marketable securities is P 10 per transaction and the
interest rate on marketable securities is 6% per year. The company estimates that it will
make cash payments of P 12,000 over a one-month period. What is the average cash balance
(rounded to the nearest peso)?

RECEIVABLES MANAGEMENT

1. Genesis Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average
150 units at a price of P 300 each. Assuming that all sales are on credit and 60% of customers
take the discount and pay on day 10 while the rest of the customers pay on day 30, the amount of
Genesis’ accounts receivable is __
2. Blue Computers believes that its collection costs could be reduced through modification of
collection procedures. This action is expected to result in a lengthening of the average collection
period from 28 days to 34 days; however, there will be no change in uncollectible accounts. The
company's budgeted credit sales for the coming year are P27,000,000, and short-term interest
rates are expected to average8%. To make the changes in collection procedures cost beneficial,
the minimum savings in collection costs (using a 360-day year) for the coming year would have
to be __ .

3. A company plans to tighten its credit policy. The new policy will decrease the average number
of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue
from 70% to 60%. The company estimates that projected sales will be 5% less if the proposed
new credit policy is implemented. If projected sales for the coming years are P50 million,
Calculate the peso impact on accounts receivable of this proposed change in credit policy.
Assume a 360-day year. __________ increase (decrease)

4. The high cost of short-term financing has recently caused a company to reevaluate the terms
of credit it extends to its customers. The current policy is 1/10, net 60. If customers can borrow
at the prime rate, at what prime rate must the company change its terms of credit in order to
avoid an undesirable extension in its collection of receivables? Use 360 days

5. Rosewood Furniture currently has annual sales of P 2 million. Its average collection
period is 40 days. Bad debts are 5 percent of sales. The credit and collection manager is
considering instituting a stricter collection policy whereby bad debts would be reduce to 2
percent of total sales, and the average collection period would fall to 30 days. However,
sales would also fall by an estimated P250,000 annually. Variable cost are 60 percent of
sales and the cost of carrying receivable is 12 percent. Assume a tax rate of 40 percent and
360 days per year.

a. What would be the incremental (decremental) investment in receivables if the change were
made?

b. What would be the incremental (decremental) change in profits?

INVENTORY MANAGEMENT

1. The Whitehead Co. produces quality jewelry items for various retailers. For the coming year,
it has estimated it will consume 500 ounces of gold. Its carrying costs for a year is P2 per ounce.
No safety stock is maintained. If the EOQ 100 ounces, what is the cost per order?

2. The Whitehead Co. produces quality jewelry items for various retailers. For the coming year,
it has estimated it will consume 500 ounces of gold. Its carrying costs for a year is P2 per ounce.
No safety stock is maintained. If the EOQ 100 ounces, what would be the estimate for
Whitehead’s total carrying costs for the coming year? __________________

3. A firm estimates that its annual carrying cost for material X is 0.30 per lb. If the firm requires
50,000 lbs per year, and ordering costs are P100 per order, what is the EOQ (rounded to the
nearest pound)?

4. Z Corp.’s EOQ for Material A is 500 units. This EOQ is based on:

Annual Demand 5,000 units

Ordering Costs P12.50

What is the annual carrying cost per unit for Material A? ____________

5. A company has estimated its economic order quantity for Part A at 2,400 units for the coming
year. If ordering costs are P200 and carrying costs are P.50 per unit per year, what is estimated
total annual usage?

6. Blanchard Corp. operates it factory 300 days per year. It annual consumption of Material Y is
1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12
business days. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per gallon per
year is P0.25, what is the total annual carrying cost for Material Y? __________________

7. The Google Company buys 5,000 microchips annually for its computer manufacturing
business. The chip come in lots of 100 per box. The cost of receiving and placing an order is
P20,000 including handling charges of P8,000. Annual carrying costs are 5% of the purchase
price of P15,000 per chip. The company maintains a safety stock of 150 chips. The delivery time
is 15 days.
What is the total inventory cost, including the cost carrying the safety stock?

8. GM Company has targeted a 10% annual return on inventory investment. The following data
are available:

Optimal Production Run 500

Average Inventory in units 250
Number of production runs 10
Cost per unit produced 4
Set-up costs per production run 10

What is GM’s cost pf carrying one unit in inventory for 1 year?

9. The following data refer to various annual costs relating to the inventory of a single-product
company:

Unit transportation-in on purchases P0.20

Storage per unit 0.12
Insurance per unit 0.10
Annual interest foregone from alternative investment of fund 800
Annual number of units required 10,000

What is the annual carrying cost per unit?

10. Blanchard Corp. operates its factory 300 days per year. Its annual consumption of Material Y
is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12
business days. What is the order point of Material Y? _________________.

11. R Corp.’s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock
of T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50
lbs.?

12. The following information regarding inventory policy was assembled by the JR Corporation.
The company uses a 50 week year in all calculations.
Sale 10,000 units per year
Order Quantity 2,000 units
Safety Stock 1,300 units
Lead Time 4 weeks

The reorder point is ___

13. The following information pertains to Material A which is used by Aiwa Co.:

Annual Usage in units 20,000

Working Days per year 250 days
Safety Stocks in units 800
Normal Lead time in Working Days 30

Units of Material X will be required evenly throughout the year. The order point is ___________

14. The following information relates to Beckam Company’s Material Q:

Annual usage in units 7,200
 Working Days/year 240
Normal Lead Time in Working Days 20
Maximum Lead Time in Working Days 45

Assuming that the units of Material Q will be required evenly throughout the year. Compute the
following: Safety Stock ____________ and Order Point _____________