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Exam 20: Credit and Inventory Management

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Question 41

Multiple Choice

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You currently sell a product with a variable cost per unit of $43 and a unit selling price of $69. At the present time you only sell on a cash basis and have monthly sales of 680 units. The monthly interest rate is.75 percent. You are considering switching to a net 30 credit policy. What is the switch break-even point?

A) 694 units
B) 698 units
C) 701 units
D) 704 units
E) 706 units

F) D) and E)
G) B) and C)

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Question 42

Multiple Choice

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About ________ of all of the assets of Canadian industrial firms are in the form of accounts receivable.

A) 8%
B) 10%
C) 17%
D) 20%
E) 50%

F) A) and C)
G) A) and E)

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Question 43

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Today, May 4^th, you bought $9,500 worth of merchandise from your supplier. The credit terms are 2/7, net 25. By what day do you have to make your payment to receive the discount?

You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 50 percent chance that this person will never pay you. The sales price of the item the customer wants to buy is $325. Your variable cost on that item is $219 and your monthly interest rate is 1 percent. You _____ grant credit because the net present value of the sale is _____.

The optimal amount of credit to be granted can be located graphically at the point where the:

All else equal, a firm that holds safety stocks of inventory will have a lower level of average inventory than a firm that does not.

Provide a definition for invoice.

A commonly used method of analyzing the creditworthiness of a potential customer is to review their payment history with other firms.

Cascade International currently has credit terms of net 45 with no discount and an average collection period of 48 days. Cascade believes that if it offered a 2/15 discount, 60% of its sales would be collected within the discount period and the remaining customers would pay in 50 days. By how many days will Cascade's average collection period change if the discount policy is adopted?

Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the NPV of granting credit?

All else the same, ________ costs are greatest when the firm holds a small quantity of inventory, and ___________ costs are greatest when there is a large quantity of inventory on hand.

A seller who extends credit for a longer period than the purchaser's inventory cycle:

Parker's Market sells 9,000 units a year of a product at a price of $4.95 each. The variable cost per unit is $3.30 and the carrying cost per unit is $.65. You have been buying 500 units at a time. Your fixed cost of ordering is $40. What is the economic order quantity?

Xylex Corporation has an annual demand of 110,000 units for its products. Its carrying cost per unit is $0.37, and its order costs are $50 per order. Given this information, calculated the number of orders the company will make during the year.

When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a payable is created for ABC.

Which of the following would tend to increase decrease the credit period?

Which of the following inventory management techniques would work best for firms where a small portion of inventory in terms of quantity might represent a large portion in terms of inventory value?

The following statement pertains to credit policy: A seller must have a source of financing sufficient to cover any accounts receivable balance created by introducing a credit policy.

What is the cost of switching?

You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent. Your experience tells you that 10 percent of these customers will never pay their bill. Should you offer credit terms of net 30 to attract these potential customers? Why or why not?