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Chapter 3: Q2BP_c (page 220)

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

c. If the total cost of the new system is $400,000, should it be implemented?

Short Answer

Expert verified

The organization should implement the new system as the benefit is more than its cost.

Step by step solution

01

Factors to be considered before implementing a plan

The organization should consider the following factors before implementing a plan:

  • The cost of the plan to the organization and its impact on the organizational operations.
  • The benefits to be generated by the organization after implementation of the plan.
  • The infrastructure required for appropriately implementing and using a plan.
02

Selection of plan

The plan should be implemented by the organization as the cost of this system will be $400,000 but the amount of cash freed up by the system will be $7,275,000 and the investment of the freed-up cash will generate $436,500 interest income for the organization.

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Most popular questions from this chapter

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

c. If the firm likes to see its bills collected in 35 days, should it be satisfied with the average collection period?

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month鈥檚 production is equal to annual sales (in units) divided by 12.

Of each month鈥檚 sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

c. Determine a cash payments schedule for January through December. The production costs of \)2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $45,000 per month.

What is the significance to working capital management of matching sales and production?

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has \(500,000 in fixed assets. Assume a tax rate of 40 percent.

b. Given that Guardian鈥檚 earnings before interest and taxes are \)200,000, calculate earnings after taxes for each of your alternatives.

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

c. What will the average inventory be?
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