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Problem 1: Krug Gold Coin, Inc.

is considering shortening its credit period


from 30 days to 20 days and believes, as a result of this change, its
average collection period will decrease from 36 days to 30 days.
Bad debt expenses are also expected to decrease from 1.2 percent
to 0.8 percent of sales. The firm is currently selling 300,000 units
but believes as a result of the change, sales will decline to 275,000
units. On 300,000 units, sales revenue is $4,200,000, variable costs
total $3,300,000, and fixed costs are $300,000. The firm has a
required return on similar-risk investments of 15 percent. Evaluate
this proposed change and make a recommendation to the firm.
Answer: Therefore, Krug Gold Coin, Inc. should not implement its proposal of
shortening its credit period from 30 days to 20 days since it would create a
loss of $43,533.

SALES ($14/unit)
VARIABLE
COST
($11/unit)
FIXED COST
BAD
DEBTS
EXPENSE
(1.2% and 0.8% of
Sales)
OPPORTUNITY COST

OLD POLICY
$4,200,000
3,300,000

NEW POLICY
$3,850,000
3,025,000

VARIANCE
$350,000 UF
275,000 F

300,000
50,400

300,000
30,800

19,600 F

(4,200,000 x
1.2%)

(3,850,000 x 0.8%)

49,500*

37,813**

* COMPUTATION
360
=10
36
3,300,000
=330,000
10
330,000 X 15% = 49,500

11,867 F
$43,533 UF

** COMPUTATION
360
=12
30
3,025 ,000
=252,083
12
252,083 X 15% = 37,813

Problem 2: Landrum Distributing, Inc. has completed an analysis of checkclearing times of five key suppliers. On a weekly basis, the firm has
a $50,000 check disbursed to each of these suppliers, totaling
$250,000. In examining the check-clearing times of each supplier,
the firm revealed:
Number of Business
Days
for Check to Clear
3
5
6
7
8

Supplier
1
2
3
4
5

Given this information, what recommendation would you give the


firm with respect to paying its suppliers weekly? Explain.
Answer:
Deposit $50,000 on
:
Supplier 1
$50,000 on
Supplier 2
$50,000 on
Supplier 3
$50,000 on
Supplier 4
$50,000 on
Supplier 5

day 3 to for
day 5 to for
day 6 to for
day 7 to for
day 8 to for

The financial manager should monitor clearings by calling the bank at the
start of the business day in order for the financial manager to estimate the
duration on the processing of the check and also to estimate when it will be
paid to the supplier that should be within the credit terms.

Problem 3: Sansatrip Products has ten different items in its finished goods
inventory. The average number of units held in inventory and the
average unit cost are listed for each item. The firm uses an ABC
system of inventory control.
Ite
m
1
2
3
4
5
6
7
8
9
10

Average
Number
of Units in
Inventory
3,000
500
4,000
50
10,000
340
1,500
460
2,500
390

Average
Cost
Per Unit
$1.50
10.00
12.00
40.00
5.00
15.00
3.00
30.00
25.00
4.10

a) Which items should be considered to be in the A category of an


ABC system of inventory?
b) Which items should be considered to be in the B category of an
ABC system of inventory?

Answers:
Ite
m
1
2
3
4
5
6
7
8
9
10

Average
Number
of Units in
Inventory
3,000
500
4,000
50
10,000
340
1,500
460
2,500
390
Total

Average
Cost
Per Unit
$1.50
10.00
12.00
40.00
5.00
15.00
3.00
30.00
25.00
4.10

Average
Investment
$ 4,500
5,000
48,000
2,000
50,000
5,100
4,500
13,800
62,500
1,599
$196,999

a. Items that should be in Category A under ABC System of inventory


management are: Item 3, Item 5, and Item 9.
b. Items that should be in Category B under ABC System of inventory
management are: Item 1, Item 2, Item 4, Item 6, Item 7, and Item 8.

MANACO:
CASE
ANALYSIS
#4
Submitted By:
Group 2
Members:
Go, Joebert A
Ritaga, Roy G.
Malaki, Katty May D.
Babalcon, Loubelle Anne G.
Amistoso, Tonette C.
Ecito, Athena Aura V.

Mendoza, Ma. Almera M.


MANACO 2 (11:00-12:00/11:30-1:00) M-F