Answers:
a. OC  Average age of inventory  Average collection period
 90  90
 180 days
b. CCC = OC ‒ Average payment period
= 180 ‒ 60
= 120 days
c. Inventory
 $9,500,000  (90 / 365) = $2,342,466
Accounts receivable  $14,000,000  (90 / 365) = $3,452,055
Accounts payable  $5,000,000  (60 / 365) = $821,918
Resources
 Inventory  Accounts receivable ‒ Accounts payable
 $2,342,466  $3,452,055 − $821,918
 $4,972,603
d. ???
Answers:
a. OC  Average age of inventory  Average collection period
 52  45
 97 days
CCC  OC ‒ Average payment period
 97 ‒ 30
 67 days
b. Inventory  $1,800,000 / 7  $257,143
c. Investment in inventory: will reduce from $257,143 to $180,000 ($1.8M / 10), freeing
funds for other purposes.
Net working capital: reduced by $77,143 ($257,143 ‒ $180,000).
Answers:
a.














b.






c.

d.





CCC



Daily financing


Resources needed 


OC

AAI
OC
365  6 times inventory  61 days
AAI  ACP
61 days  45 days
106 days
OC  APP
106 days  30 days
76 days
$3,000,000  365
$8,219
Daily financing  CCC
$8,219  76
$624,644
56 days  35 days
 91 days
CCC
 91 days  40 days
 51 days
Resources needed  $8,219  51
 $419,169
Additional profit  (daily expenditure  reduction in CCC)  financing rate
 ($8,219  25)  0.13 $26,712
Reject the proposed techniques because costs ($35,000) exceed savings ($26,712).
Answers:
a.
Total Funds
Requirements
Permanent
Requirements
$2,000,000
2,000,000
$2,000,000
2,000,000
March
2,000,000
2,000,000
0
April
4,000,000
2,000,000
2,000,000
May
6,000,000
2,000,000
4,000,000
June
9,000,000
2,000,000
7,000,000
12,000,000
14,000,000
2,000,000
2,000,000
10,000,000
12,000,000
September
9,000,000
2,000,000
7,000,000
October
5,000,000
2,000,000
3,000,000
November
4,000,000
2,000,000
2,000,000
December
3,000,000
2,000,000
1,000,000
Month
January
February
July
August
Average permanent requirement  $2,000,000
Average seasonal requirement  $48,000,000  12

 $4,000,000
Seasonal
Requirements
$
0
0
b.
c.

d.
(1) Under an aggressive strategy, the firm would borrow from $1,000,000 to $12,000,000
per the seasonal requirement schedule (see part a) at the prevailing short-term rate. The
firm would borrow $2,000,000, or the permanent portion of its requirements, at the
prevailing long-term rate.
(2) Under a conservative strategy, the firm would borrow at the peak need level of
$14,000,000 at the prevailing long-term rate.
Aggressive  ($2,000,000  0.10)  ($4,000,000  0.05) $200,000  $200,000

 $400,000 Total Cost
Note : No surplus balances under this approach.
Conservative Borrow $14,000,000 to cover peak need during the year, thus have excess
cash to invest during much of the year.
Average amount of excess/surplus cash:
$14M peak need – ($2M ave. permanent req’t + $4M ave. seasonal need) = $8 million.
Total interest paid ($14,000,000 × 0.10)
$1,400,000
Total interest received ($8,000,000 × 0.03)
(
240,000)
Net cost of conservative approach
$1,160,000
The aggressive approach is less costly for two reasons. (1) some of the money that the firm
borrows costs 5% rather than 10%, while the firm pays 10% on all of its debt under the
conservative approach. (2) the firm borrows less in total over the year.
However, the conservative approach guarantees that the firm will have the money it needs
throughout the year, while the aggressive approach assumes that the firm can borrow at 5%
whenever it wants to. The aggressive approach exposes the firm to refinancing risk, so
managers will have to make a judgment about whether eliminating that risk is worth the
added cost of the conservative approach.
Answers :
a.
EOQ 

2 S O
C
2  1, 200,000  15
0.3  50
 2, 4000,000
b.
 1,549.19
 1,550 units
If the order cost is zero and implication to the firm if there is a decrease in the order cost:
EOQ = 0
If ordering cost decreases: EOQ decreases. It will be more cost effective for the firm to place
more orders and keep less in stock (reducing carrying cost) provided that no stockouts occur.
Answers:
a.
EOQ 

2 S O
C
2  1,000  28
5
 11, 200
 105.83
 106 units
Average inventory  EOQ / 2
 106 / 2
 53 units
b.
Number of orders  1,000 / 106
 9.43
Outdoor Living Manufacturers will have to place 10 orders during one financial year
provided that all costs remain unchanged.
c.
Reorder point  Days of lead time  Daily usage  Safety stock
 5  (1,000 / 365)  [7  (1,000 / 365)]
 32.88units
Order should be placed when inventory reaches 33 units.
d.
Order cost: Fixed, will not change.
Carrying cost: Remain unchanged.
Total inventory cost: May increase if stock outs occur.
Reorder point: Will decrease from 33 units to 14 units.
EOQ: EOQ will not change as safety stock does not influence the EOQ.
Answers:
a. Collection float  2  2  2.5  6.5 days
b. Opportunity cost  $65,000  3.0  0.09  $17,550
The firm should accept the proposal because the savings ($17,550) exceed the costs
($16,500), and it does make sense to pay $16,500 to reduce float by 3 days because the
benefits exceed the costs.
Answers:
a. Cash made available  $3,240,000  365
  
 ($8,877/day)  3 days  $26,631
b. Net benefit
 $26,631  0.15
 $3,995
The $9,000 cost exceeds $3,995 benefit; therefore, the firm should not accept the lockbox
system.
Answers:
Current average balance in disbursement account
Opportunity cost (12%)
Current opportunity cost
$420,000
 0.12
$ 50,400
Zero-balance account
Compensating balance
$300,000
Opportunity cost (12%)
 0.12
Opportunity cost
$ 36,000
 Monthly fee ($1,000  12)
12,000
Total cost
$ 48,000
The opportunity cost of the zero-balance account proposal ($48,000) is less than the current
account opportunity cost ($50,400). Therefore, accept the zero-balance proposal.