Chapter 3: 3DQ (page 182)
What is the significance to working capital management of matching sales and production?
An organization can keep a minimum level of inventory if the sales and production are matched.This helps in managing the working capital working capital with ease.
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Gary’s Pipe and Steel Company expects sales next year to be \(800,000 if the economy is strong, \)500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year?
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.
a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.
Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
Thompson Wood Products has credit sales of \(2,160,000 and accounts receivable of \)288,000. Compute the value of the average collection period.
Esquire Products Inc. expects the following monthly sales:
January | \(28,000 |
February | \)19,000 |
March | \(12,000 |
April | \)14,000 |
May | \(8,000 |
June | \)6,000 |
July | \(22,000 |
August | \)26,000 |
September | \(29,000 |
October | \)34,000 |
November | \(42,000 |
December | \)24,000 |
Total annual sales | \(264,000 |
Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.
b. Determine a cash receipts schedule for January through December. Assume that dollar sales in the prior December were \)20,000. Work part b using dollars.
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