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Chapter 3: 9DQ (page 219)
What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?
The EOQ reflects an optimum level of inventory that should be ordered to minimize the inventory cost by an organization. It assumes that the inventory is consumed at a constant rate.
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If you borrow \(5,300 at \)400 interest for one year, what is your effective interest rate for the following payment plans?
d. Monthly payments.
Briefly discuss three types of lender control used in inventory financing.
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 14 percent against the euro. What is the effective interest rate on the loan for one year? (Consider the 14 percent fall in the value of the dollar as well as the interest payment.)
City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm鈥檚 checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.
a. If City Farm has \(5 million per day in collections and \)3 million per day in disbursements, how many dollars has the cash management system freed up?
Charming Paper Company sells to the 12 accounts listed here:
Account | Receivable balance outstanding | Average age of account over the last year |
A | \(60,800 | 22 |
B | \)168,000 | 43 |
C | \(78,300 | 19 |
D | \)24,300 | 55 |
E | \(58,900 | 42 |
F | \)238,000 | 39 |
G | \(30,400 | 16 |
H | \)374,000 | 72 |
I | \(41,400 | 32 |
J | \)96,500 | 58 |
K | \(292,000 | 17 |
L | \)67,700 | 37 |
Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.
The current prime rate is 15.5 percent, and Capital charges 4.5 percent over prime to Charming as its annual loan rate.
a. Determine the maximum loan for which Charming Paper Company could qualify.
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