E15-1 Sharam Industries has a 120-day operating cycle. If
its average age of inventory is 50 days, how long is its average collection
period? If its average payment period is 30 days, what is its cash conversion
cycle? Place all of this information on a time line similar to Figure 15.2 on page
E15-2 Icy Treats, Inc., is a seasonal business that sells
frozen desserts. At the peak of its summer selling season the firm has $35,000
in cash, $125,000 in inventory, $70,000 in accounts receivable, and $65,000 in
accounts payable. During the slow winter period the firm holds $10,000 in cash,
$55,000 in inventory, $40,000 in accounts receivable, and $35,000 in accounts
payable. Calculate Icy Treats’ minimum and peak funding requirements.
E15-3 Mama Leone’s Frozen Pizzas uses 50,000 units of cheese
per year. Each unit costs $2.50. The ordering cost for the cheese is $250 per
order, and its carrying cost is $0.50 per unit per year. Calculate the firm’s
economic order quantity (EOQ) for the cheese. Mama Leone’s operates 250 days
per year and maintains a minimum inventory level of 2 days’ worth of cheese as
a safety stock. If the lead time to receive orders of cheese is 3 days,
calculate the reorder point.
E15-4 Forrester Fashions has annual credit sales of 250,000
units with an average collection period of 70 days. The company has a per-unit
variable cost of $20 and a per-unit sale price of $30. Bad debts currently are
5% of sales. The firm estimates that a proposed relaxation of credit standards
would not affect its 70-day average collection period but would increase bad
debts to 7.5% of sales, which would increase to 300,000 units per year.
Forrester requires a 12% return on investments. Show all necessary calculations
required to evaluate Forrester’s proposed relaxation of credit standards.
E15-5 Klein’s Tools is considering offering a cash discount
to speed up the collection of accounts receivable. Currently the firm has an
average collection period of 65 days, annual sales are 35,000 units, the
per-unit price is $40, and the per-unit variable cost is $29. A 2% cash
discount is being considered. Klein’s Tools estimates that 80% of its customers
will take the 2% discount. If sales are expected to rise to 37,000 units per
year and the firm has a 15% required rate of return, what minimum average
collection period is required to approve the cash discount plan?
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