Chapter 3: Q10DQ (page 219)
Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?
The safety stock helps an organization against the risk of loss of sales, and the increase in safety stock increases the carrying cost of inventory.
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What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?
What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be?
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:
March | 3,250 |
April | 7,250 |
May | 11,500 |
June | 9,500 |
Total units | 31,500 |
If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up. The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,500 units over four months at a level of 7,875 per month.
a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.
b. If the inventory costs $12 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 0.01 as the monthly rate.)
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by \(150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.
Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times.
d. What would be the total incremental investment in accounts receivable and inventory to support a \)65,000 increase in sales?
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