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CH 15 Solutions To Selected End of Chapter Problems

This document provides solutions to problems P15-5 through P15-11 from Chapter 15. It includes: 1) Calculations for economic order quantities, reorder points, safety stock, inventory costs, and accounts receivable for various scenarios. 2) Analyses of whether companies should change their credit policies based on calculations of additional sales and profits versus costs of increased bad debts and investment in accounts receivable. 3) Determinations of whether cash discounts should be offered by comparing increased profits from new sales against costs of the discounts.

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15 views

CH 15 Solutions To Selected End of Chapter Problems

This document provides solutions to problems P15-5 through P15-11 from Chapter 15. It includes: 1) Calculations for economic order quantities, reorder points, safety stock, inventory costs, and accounts receivable for various scenarios. 2) Analyses of whether companies should change their credit policies based on calculations of additional sales and profits versus costs of increased bad debts and investment in accounts receivable. 3) Determinations of whether cash discounts should be offered by comparing increased profits from new sales against costs of the discounts.

Uploaded by

bobhamilton3489
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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59

CHAPTER 15

SOLUTIONS TO PROBLEMS: P15-5, 15-6, 15-8, 15-9, 15-10, 15-11, 15-13

P15-5. EOQ Analysis


LG 3: Intermediate
( × × ) ( × , , ×$ )
a. (1) EOQ = = = 1,549 units
. ×
b. EOQ = 0: EOQ decreases as ordering cost decreases. It will be more cost effective for the firm to
place more orders and keep less in stock (reducing carrying cost) provided that no stockouts occur.

P15-6. EOQ, reorder point, and safety stock


LG 3; Intermediate
( × × ) ( × , ×$ )
a. EOQ = = = 106 units
Average level of inventory  EOQ ÷ 2  53 units
b. Number of orders  1,000 ÷106  9.45 units
Outdoor Living Manufacturers will have to place 10 orders during one financial year provided that all
costs remain unchanged.
× , × ,
c. Reorder point= + = 32.88 units = 33 units
Note: The question is a bit misleading, suggesting that safety stock compensates for lead-time. This is
not normally the case. Both lead-time and safety stock need to be taken into account. The firm will
need to reorder in sufficient time to allow for expected usage during the lead-time and will normally
keep an additional buffer (safety stock) to allow for variability of the usage rate and delivery time.
d. Total cost = total order costs + total carrying costs = (O × S/Q) + (C × Q/2)

With safety stock


Total cost = ($28 × 1,000/106) + ($5 × 106/2 units) + ($5 × 20 units) = $629

Without safety stock


Total cost = ($28 × 1,000/106) + ($5 × 106/2) + $529

Effect on:
Order cost: The order cost is fixed and will not change.
Carrying cost: Decreases by the cost of carrying safety stock
Total inventory cost: Decreases by the cost of carrying safety stock. May increase if stock outs
occur.
× ,
Reorder point = = 13.7 units = 14 units
The reorder point will decrease from 33 units to 14 units.
EOQ: EOQ will not change as safety stock does not influence the EOQ.

© 2019 Pearson Education


60

P15-8. Accounts receivable changes without bad debts


LG 4; Intermediate
a. Additional profit contribution from sales
Current credit sales  $1,580,000  0.6 = $948,000
Current credit sales (units)  $948,000 ÷ 20 = 47,400 containers
Proposed plan credit sales  47,400  1.2 = 56,880 containers
Profit per container  $20  $15 = $5
Additional profit  $5  (56,880  47,400) = $47,400
b. Turnover of accounts receivable =

variable cost of annual sales


Average Investment in AR =
AR turnover

365
Turnover of AR under present plan = = 6.0833
60
Average investment under present plan  ($15 47,400) ÷ 6.0833  $116,876.71

365
Turnover of AR under proposed plan = = 5.5303
66

Average investment under proposed plan  ($15 56,880) ÷ 5.5303 $154,277.26

Marginal investment in accounts receivable  $154,277.26 - $116,876.71 = $37,400.55

c. Cost of marginal investment  $37,400.55  0.12  $4,488.07

d.
Additional profit $47,400.00
Cost of marginal investment in AR - 4,488.07
Net benefit/loss $42,911.93
Yes, as the net profit from implementing of proposed plan is $42,911.93

P15-9. Accounts receivable changes and bad debts


LG 4; Challenge
a. Bad debts
Proposed plan (120,000  €25  0.1) €300,000
Present plan (100,000  €25  0.05) 125,000
b. Cost of marginal bad debts €175,000
c. No, because the cost of marginal bad debts exceeds the savings of €50,000.
d. Additional profit contribution from sales:
20,000 additional units  (€25  €15) €200,000
Cost of marginal bad debts (from part b) (175,000)
Savings 50,000
Net benefit from implementing proposed plan €75,000
This policy change is recommended because the increase in sales and the savings of €50,000 exceed
the increased bad debt expense.

© 2019 Pearson Education


61

e. When the additional sales are ignored, the proposed policy is rejected. However, when all the benefits
are included, the profitability from new sales and savings outweigh the increased cost of bad debts.
Therefore, the policy is recommended.

P15-10. Relaxation of credit standards


LG 4; Challenge
Additional profit contribution from sales
Current credit sales (units) = 15,500 bags
Current credit sales = $232,500
New credit sales (units) = 17,050 bags
New credit sales = $255,750
Increase in credit sales = 1,550 bags
Profit per container = $15  $12 = $3
Additional profit = $3  1,550 = $4,650

365
Turnover of accounts receivable =
Average collection period
variable cost of annual sales
Average Investment in AR =
AR turnover

365
Turnover of AR under proposed plan = = 8.1111
45

Average investment under proposed plan = ($12 17,050) / 8.1111 = $25,224.66

365
Turnover of AR under present plan = = 12.1667
30

Average investment under present plan = ($12 15,500) / 12.1667 = $15,287.67

Marginal investment in accounts receivable = $25,224.66 - $15,287.67 = $9,936.99


Cost of marginal investment = $9,936.99  0.22 = $2,186.14

Bad debts under proposed plan = $255,750  0.05 = $12,787.50


Bad debts under present plan = $232,500  0.02 = $4,650.00
Cost of marginal bad debts = $12,787.50  $4,650.00 = $8,137.50

Additional profit $4,650.00


Cost of marginal investment in accounts receivable - 2,186.14
Cost of marginal bad debts - 8,137.50
Net benefit/loss -$5,673.64

No, as a net loss from implementing the proposed plan of $5,673.64 will be made.

© 2019 Pearson Education


62

P15-11. Initiating a cash discount


LG 5; Challenge
Additional profit contribution from sales
Current credit sales (units) = 30,000 units
Current credit sales = $1,200,000
New credit sales (units) = 38,000 units
New credit sales = $1,520,000
Increase in credit sales = $320,000 (8,000 units)
Profit per unit = $40  $32 = $8
Additional profit = $64,000

365
Turnover of accounts receivable =
Average collection period
variable cost of annual sales
Average Investment in AR =
AR turnover

365
Turnover of AR under present plan = = 6.0833
60

Average investment under present plan = ($32  30,000) ÷ 6.08333 = $157,808.22

365
Turnover of AR under proposed plan = = 12.1667
30

Average investment under proposed plan = ($32 38,000) ÷ 12.1667 = $99,945.21

Reduction in accounts receivable investment = $157,808.22 - $99,945.21 = $57,863.01


Cost savings from reduced investment in accounts receivable = 0.20  $57,863.01 = $11,572.60
Cost of cash discount = (0.05  0.8  38,000 $40) = $60,800

Additional profit $64,000.00


Savings from marginal investment in AR 11,572.60
Cost of cash discount - 60,800.00
Net benefit/loss $14,772.60

Yes, the proposed plan should be implemented as the net profit is $14,772.60.

© 2019 Pearson Education


63

P15-13. Lengthening the credit period


LG 5; Challenge
a. Additional profit contribution from sales
Current credit sales = $650,000 (32,500 units)
Proposed plan credit sales = $710,000 (35,500units)
Profit per unit = $20 ‒ ($455,000 ÷ 32,500) = $6
Additional profit = $6  (35,500 ‒ 32,500) = $18,000
b.
365
Turnover of accounts receivable =
Average collection period
variable cost of annual sales
Average Investment in AR =
AR turnover

365
Turnover of AR under present plan = = 12.1667
30

Average investment under present plan = ($14  32,500) ÷ 12.1667 = $37,397.26

365
Turnover of AR under proposed plan = = 8.1111
45

Average investment under proposed plan = ($14  35,500) ÷ 8.1111 = $61,273.97

Marginal investment in accounts receivable = $61,273.97 - $37,397.26 = $23,876.71


Cost of marginal investment in A/R = $23,876.71 × .165 = $3,939.66

c. Bad debts under present plan = $650,000  0.01 = $6,500


Bad debts under proposed plan = $710,000  0.02 = $14,200
Cost of marginal bad debts = $6,500 ‒ $14,200 = $7,700
d.
Additional profit $18,000.00
Cost of marginal investment in AR - 3,939.66
Cost of marginal bad debts - 7,700.00
Net benefit/loss $6,360.34

Yes, the proposal can be accepted as the additional profit exceeds the sum of the additional cost in
accounts receivable and bad debts by $6,360.34.

© 2019 Pearson Education

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