lOMoAR cPSD| 22592286

Others WALK IN Norsu MAS Finals 14 x11 Financial Management B Working Capital Management

Bachelor of sscience in Civil Engineering (Negros Oriental State University)

Studocu is not sponsored or endorsed by any college or university

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
B. WORKING CAPITAL MANAGEMENT Management)

THEORIES:
Working capital management
1. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.

17. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage

Working capital financing policy

Aggressive
5. Zap Company follows an aggressive financing policy in its working capital management while Zing Corporation follows a conservative financing policy.
Which one of the following statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances short-term assets with short-term debt.

6. Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

Conservative
2. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.

Moderate
3. Short-term financing plans with high liquidity have:
A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

Temporary & Permanent working capital

4. Temporary working capital supports
A. the cash needs of the company. C. acquisition of capital equipment.
B. payment of long term debt. D. seasonal peaks.

Cash Management
Motives for holding cash
7. The transaction motive for holding cash is for:
A. a safety cushion C. compensating balance requirements
B. daily operating requirements D. none of the above

Float
8. The difference between the cash balance on the firm's books and the balance shown o

636

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
the bank statement is called:
A, the compensating balance C. a safety cushion
B. float D. none of the above

Cash conversion cycle

9. The length of time between payment for inventory and the collection of cash is referred to as:
A. payables deferral period C. operating cycle
B. receivables conversion period D. cash conversion cycle

10.As a firm's cash conversion cycle increases, the firm:

A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period
D. incurs more shortage costs

11.The longer the firm's accounts payable period, the:

A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.

12.The average length of time a peso is tied up in current asset is called the:
A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period.

Receivables management
13.All of these factors are used in credit policy administration except:
A. credit standards C. peso amount of receivables
B. terms of trade D. collection policy

14.Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.

15.All but which of the following is considered in determining credit policy?

A. Credit standards C. Accounts payable deferral period
B. Credit limits D. Collection efforts

Inventory management
16.The use of safety stock by a firm will:
A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above

18. When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item
A. decreases by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock.

19. Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50% higher than total
carrying costs?
A. Current order size is greater than optimal
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used

Trade credit
20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?

637

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.

PROBLEMS
Working capital financing
i
. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable conversion cost. It take s the firm 18 days to
convert raw materials into calculator. Casie’s usual credit terms extended to its customers is 30 days, and the firm generally pays its suppliers in 20
days.
If the foregoing cycles are constant, what amount of working capital must Casie Company finance?
A. P1,400,000 C. P 900,000
B. P2,400,000 D. P1,800,000

Cash conversion cycle

ii
. Luke Company has an inventory conversion period of 60 days, a receivables conversion period of 45 days, and a payments cycle of 30 days. What is the
length of the firm’s cash conversion cycle?
A. 90 days C. 54 days
B. 75 days D. 105 days

iii
. The Spades Company has an inventory conversion period of 75 days, a receivables conversion period of 38 days, and a payable payment period of 30
days. What is the length of the firm’s cash conversion cycle?
A. 83 days C. 67 days
B. 113 days D. 45 days

iv
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5
million in accounts payable. Its average daily purchases are P50,000. What is the length of the company’s cash conversion period?
A. 50 days C. 30 days
B. 20 days D. 40 days

Days inventory
v
. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 million in average inventory, and a cash conversion cycle
of 75 days?
A. 6.56 days C. 52.60 days
B. 18.75 days D. 67.50 days

vi
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5
million in accounts payable. Its average daily purchases are P50,000. What is the length of the company’s inventory conversion period?
A. 50 days C. 120 days
B. 90 days D. 40 days

Cash management
Economic conversion quantity (ECQ)
vii
. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Simile has the opportunity to invest the money at 24%
per annum. The company spends, on the average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000 C. P45,000
B. P55,000 D. P72,500

Opportunity cost
viii
. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which are to be paid uniformly. Hyperbole has the opportunity to
invest the money at 9% per annum. The company spends, on the average, P25 for every cash conversion

638

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
to marketable securities and vice versa.
What is the opportunity cost of keeping cash in the bank account? A. P3,825.00 C. P4,190.00
B. P1,912.50 D. P 188.55

Annual savings
ix
. What are the expected annual savings from a lock-box system that collects 150 checks per day averaging P500 each, and reduces mailing and processing
times by 2.5 and 1.5 days respectively, if the annual interest rate is 7%?
A. P 5,250 C. P 21,000
B. P 13,125 D. P300,000

Receivables management
Carrying cost
x
. The Camp Company has an inventory conversion period of 60 days, a receivable conversion period of 30 days, and a payable payment period of 45 days.
The Camp’s variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost of capital for Camp is 12%.
If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying cost on accounts receivable, using 360 days year?
A. P281,250 C. P 20,250
B. P168,750 D. P 56,250

Average receivables
xi
. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty percent of the customers pay on the tenth day and take
discounts; the other 60 percent pay, on average, 45 days after their purchases.
What is the average amount of receivables? A. P70,000 C. P77,200
B. P77,500 D. P67,500

xii
. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. Palm estimates
that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days.
Based on a 360-day year, the proposed relaxation of credit to standards will result in an expected increase in the average accounts receivable balance
of
A. P 540,000 C. P2,700,000
B. P 900,000 D. P1,620,000

Investment in receivables
xiii
. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection period is 45 days, and bad debts are 3 percent of sales. The credit
and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 1.5 percent of total sales, and the
average collection period would fall to 30 days. However, sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of
sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent and 360 days per year.
What would be the decrease in investment in receivables if the change were made? A. P 9,688 C. P 96,875
B. P 12,988 D. P129,975

Comprehensive
Question Nos. 14 through 16 are based on the following data:
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net
30 in order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 percent discount. Und er the new term, discount
customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on
time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not
expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to
P2.6 million per year. Sonata Company’s variable cost ratio is 75 percent, the interest rate on

639

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
funds invested in accounts receivable is 9 percent, and the firm’s income tax rate is 40 percent.

xiv
. What are the days sales outstanding (DSO) before and after the change of credit policy?
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively

xv
. The incremental carrying cost on receivable is A. P 843.75 C. P 643.75
B. P8,889.00 D. P6,667.00

xvi
. The incremental after tax profit from the change in credit terms isA. P68,493 C. P60,615
B. P65,640 D. P57,615

Inventory management
EOQ
xvii
. What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags of premium sugar per year. The cost per order is P200
and the firm experiences a carrying cost of P0.80 per bag.
A. 2,000 bags C. 8,000 bags
B. 4,000 bags D. 16,000 bags

Annual demand
xviii
. Marsman Co. has determined the following for a given year: Economic order quantity (standard order size)
5,000 units Total cost to place
purchase orders for the year P40,000 Cost to place one
purchase order P 100
Cost to carry one unit for one year P 4
What is Marsman’s estimated annual usage in units? A. 1,000,000 C. 500,000
B. 2,000,000 D. 1,500,000

Required annual return on investment

xix
. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells blank and recorded videos. Pirate Mart purchases tapes from
BIBO Company at P300.00 per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight, and Pirate Mart does not inspect
the tapes due to BIBO Company's reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart earns
20% on its cash investments. The purchase-order lead time is two weeks.
The following cost data are available:
Relevant ordering costs per purchase order P80 P90.50 Carrying costs per
package per year 3
Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50 What is the
required annual return on investment per package?
A. P6,000 C. P1,200
B. P 250 D. P 600

Order quantity
xx
. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its average inventory (taking into account the safety stock) is 12,000
pounds. What is the apparent order quantity?
A. 18,000 lbs. C. 14,000 lbs.
B. 6,000 lbs. D. 24,000 lbs

Optimal safety stock level

xxi
. Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence. The company’s carrying cost per unit of inventory is P5 per year, and the
company orders 1,500 units of product 20 times a year at a cost of P100 per order. The probabilities of a stockout at various levels of safety stock
are:

640

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Units of Safety Stock Probability of Stockout 0.
Management)
0.50
100. 0.30
200. 0.14
300. 0.05
400. 0.01
The optimal safety stock level for the company based on the units of safety stock level above is
A. 200 units C. 100 units
B. 300 units D. 400 units

xxii
. Paeng Company uses the EOQ model for inventory control. The company has an annual demand of 50,000 units for part number 6702 and has
computed an optimal lot size of 6,250 units. Per-unit carrying costs and stockout costs are P9 and P4, respectively. The following data have been gathered
in an attempt to determine an appropriate safety stock level:
Units Short Because of Excess Demand during the Lead Time Period

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Number of Times Short in the last 40 Reorder Cycles Financial Management

100 8 (B. Working Capital
200 10
300 14 Management)
400 8
What is the optimal safety stock level?
A. 100 units C. 200 units
B. 300 units D. 400 units

Annual inventory costs

xxiii
. Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The fabric costs P25 per yard. The current policy is to order the
fabric four times a year. Incremental ordering costs are about P200 per order, and incremental carrying costs are about P0.75 per yard, much of
which represents the opportunity cost of the funds tied up in inventory.
How much total annual costs are associated with the current inventory policy? A. P19,550 C. P38,300
B. P18,750 D. P62,500

Maximum interest rate

xxiv
. Narra Company is considering a switch to level production. Cost efficiencies will occur under level production and after tax cost would decline by
P70,000 but inventory would increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at a cost of 10.5 percent.
What is the maximum interest rate that makes level production feasible?
A. 7.00 percent C. 8.75 percent
B. 5.83 percent D. 10.00 percent

Opportunity cost
xxv
. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high selling products for the coming year. Its supplier quoted a price
of P25 per zipper. Diesel planned to purchase 7,500 units per month but its supplier could not guarantee this delivery schedule. In order to ensure
availability of these zippers, Diesel is considering the purchase of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the
company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
A. P127,500 C. P123,750
B. P135,000 D. P264,000

Trade credit
xxvi
. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the discount is:
A. 2.0%. C. 36.7%
B. 30.0%. D. 10.0%.

641

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
xxvii
. The cost of discounts missed on credit terms of 2/10, n/60 is
A. 2.0 percent C. 12.4 percent
B. 14.9 percent D. 21.2 percent

Bank loans
Discount loan
xxviii
. You plan to borrow P10,000 from your bank, which offers to lend you the money at a10 percent nominal, or stated, rate on a one-year loan. What is
the effective interest rate if the loan is a discount loan?
A. 10.00% C. 12.45%
B. 11.11% D. 14.56%

Discount loan with compensating balance

xxix
. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating balance? Assume 360 days per year.
A. 20.0% C. 17.4%
B. 15.0% D. 22.2%

Compensating balance with interest

xxx
. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required
to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would
otherwise maintain only P100,000 in its checking account for transactional purposes. Premiere’s effective interest costs of the loan is
A. 12.00% C. 16.30%
B. 14.25% D. 15.86%

Add-on
xxxi
. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a12% stated rate in an add-on arrangement, payable in 12 equal
monthly installments. A. 22.15% C. 25.05%
B. 24.00% D. 12.70%

Financing alternative
xxxii
. A company has accounts payable of P5 million with terms of 2% discount within 15days, net 30 days (2/15 net 30). It can borrow funds from a bank at
an annual rate of 12%, or it can wait until the 30th day when it will receive revenues to cover the payme nt. If it borrows funds on the last day of the
discount period in order to obtain the discount, its total cost will be
A. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more

xxxiii
. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The credit terms for these purchases are 2/10, net 30, and
payment is made on the 30th day after each delivery. Thus, the company is considering a 1-year bank loan for P9,800 (98% of the invoice amount).
If the effective annual interest rate on this loan is 12%, what will be the net peso savings over the year by borrowing and then taking the discount on
the materials?
A. P3,624 C. P4,800
B. P1,176 D. P1,224

xxxiv
. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent can be arranged at any time. When should the customer
pay the invoice?
A. Pay on the 1st. C. Pay on the 40th
B. Pay on the 10th D. Pay on the 60th

xxxv
. The Peninsula Commercial Bank and Island Corporation agreed to the following loan proposal:
Stated interest rate of 10% on a one-year discounted loan; and
15% of the loan as compensating balance on zero-interest current account to be

642

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Financial Management
(B. Working Capital
Management)
maintained by Island Corporation with Peninsula Commercial Bank.
The loan requires a net proceeds of P1.5 million. What is the principal amount of loan applied for as part of the loan agreement?
A. P1,666,667 C. P1,764,706
B. P2,000,000 D. P1,125,000

643

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

i
. Answer: A
Daily working capital required: 200 x 250 50,000
Total working capital needed: 28 days x 50,000 1,400,000
CCC = 18 + 30 – 20 28 days

. Answer: B
ii

Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts Payable payment days
Inventory cycle in days 60 days
Average collection period 45 days
Operating cycle 105 days
Deduct Accounts payable payment days 30 days Cash conversion
cycle 75 days

iii
. Answer: A
Inventory cycle in days 75 days
Average collection period 38 days
Operating cycle 113 days
Deduct Accounts payable payment days 30 days Cash conversion
cycle 83 days

iv
. Answer: D
Inventory conversion period (See #4) 50.0 days
Average collection period (2M/0.1M) 20.0 days
Operating cycle 70.0 days
Less: Ave. Accounts Payable payment days (1.5M/0.5M)30.0 days Cash conversion period 40.0 days

v
. Answer: D
Inventory turnover:
Cost of goods sold/Ave. Inventory (8M/1.5M) 5.33x Inventory
conversion period (360 days/5.33) 67.5 days

vi
. Answer: A
Annual sales 360 days x 100,000 36.0M
Inventory turnover 36M/5M 7.2x Inventory
conversion period 360/7.2 50.0 days

vii
. Answer: B
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000

. Answer: B
viii

OTS: (2 x P3,251,250 x P25 ÷ = P42,500

0.09)^1/2
ix

Opportunity cost: P42,500 ÷ 2 x 0.09 P 1,912.50

x

. Answer: C
Reduction in cash float (2.5 + 1.5) 4.0 days
xi
Additional free cash (4 days x 150 x P500) P300,000
xii
Annual savings (P300,000 x 0.07) P 21,000

. Answer: C
Average AR 3,375,000/360 x 30 days 281,250
xiii Average investment: 281,250 x 0.60 168,750
Carrying cost: 168,750 x 0.12 20,250

. Answer: B
DSO = (.4 x 10) + (.60 x 45) 31 days
Average AR: 900,000/360x31 days P77,500

. Answer: D
Credit sale = 40,500,000 x 80% = 32,400,000
Increased credit sales: 32,400,000 x 1.2 = 38,880,000
New Average AR 38,880,000/360 x 40 = 4,320,000
Old Average AR 32,400,000/360 x 30 = 2,700,000
Increase in Average AR 1,620,000

. Answer: C
Change in average accounts receivables:

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Planned: 2,200,000/360x30 183,333

Present: 2,500,000/360x45 312,500
Decrease in AR balance 129,667
Variable cost ratio 75%
Decrease in investment in AR 96,875

. Answer: A
xiv

Days’ sales outstanding

xv Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days

. Answer: A
xvi
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09
xvii

. Answer: A
xviii
Incremental sales 600,000
Variable cost (.75 x 600,000) ( 450,000)
xix
Additional bad debts (600,000 x 2%) ( 12,000)
Additional carrying cost ( 844)
xx
Additional discounts (2,600,000 x .5 x 03) –(2,000,000 x .4 .02)
x
23,000)
xxi Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493

. Answer: B
EOQ = (2 x 32,000 x 20 0.8)^1/2 = 4,000 bags

. Answer: B
Number of orders made 40,000/100 400
Annual requirement 400 x 5,000 2,000,000

. Answer: C
Investment in 1 package (20 x P300) P6,000
Required annual return: P6,000 x 0.2 P1,200

. Answer: C
Average inventory units 12,000
Less safety units 5,000
Average inventory based on EOQ 7,000
Order size 7,000 x 2 14,000

. Answer: D

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

Safety stockStock out Costs (1)Carrying Costs @

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

843.75

(
P5Total10010,500500P11,0002004,9001,0005,9003001,7501,5003,2504003502,0002,3 50
Stockout Costs
100 1750 x .30 x 20 orders = 10,500
200 1750 x .05 x 20 = 4,900
300 1750 x .05 x 20 = 1750
400 1750 x .01 x 20 = 350
Optimal safety stock is 400-unit level with a cost of only P2,350 cost.

xxii
. Answer: B
The optimal safety stock level represents the level that gives the lowest sum of stock out costs and additional carrying costs. Based on the
computation below, the lowest combined costs is P3,340, corresponding to 300-unit level
First compute the stockout costs based on given probability of demand. Starting with 100-unit level as safety stock, if the additional demand is
200, the company has stockout of 100 units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9)
4,960
200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9)4,200
300: (100 x 31 x 0.20) + (300 x 9) 3,340
400: (400 x 9) 3,600

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

stockout per unit x 8 orders per year.

.Answer: A
xxiii

Ordering costs 4 x P200 800

Carrying costs (50,000 ÷ 2 x 0.75 18,750
. Answer: C Total 19,550
xxiv

Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate 70,000 / (1,800,000 – 1,000,000) = 8.75%

xxv
. Answer: C
Number of units to be purchased in advance: 90,000 – 7,500 82,500 Average investments in
working capital: 82,500 x 0.5* x P25 1,031,250 Opportunity cost 1,031,250 x 0.12
123,750
*The average investment is one-half (82,500 + 0) ÷ 2

xxvi
. Answer: C
k = (2 98) x (360 20 = 36.7%
The solution assumes that the company foregoes the discount only once during the year.

xxvii
. Answer: B
With credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the net payment (invoice price minus the cash discount) at the
rate of 2 percent for 50 days, paying the loan on the 60th day. The annualized rate of foregoing the discount is
14.9 percent.
k = 2/98 x 365/50 = 14.9%

xxviii
. Answer: B
k = 10 ÷ (100 – 10) = 11.11%

. Answer: C
xxix

Principal 200,000
Less: Discount 200,000 x 0.15 x 90/360 ( 7,500)
Compensating balance ( 20,000)
Net proceeds 172,500
xxx

Less interest income on additional CA balance (200,000 x 0.03) 6,000 Net interest cost
Effective rate: 114,000/(1,000,000
Effective interest rate
(7,500/172,500) x 360/90
– 200,000)14.25%
17.4%114,000
xxxi
. Answer: . A Answer: B
Interest for 1 year 1M x 12% 120,000
Interest
Average Principal: expense
[1M + (1M/12)] ÷ 2 1M x 0.12 120,000
541,667 Estimated
effective rate 120,000/541,667 22.15%
Alternative solution for approximate effective rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal] (2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%

xxxii
. Answer: C
Discount 5M x 0.02 100,000
Interest (5M x 0.98 x 0.12) x 15/360 = 24,500 Savings = 75,500

xxxiii
. Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases 4,800
Interest on borrowed money 9,800 x 0.12 1,176
Savings 3,624
Number of purchases: 360 days/15-day interval 200

xxxiv
. Answer: B
The cost of discounts missed is 12.3% which is more than the 8 percent that the bank charges. The company should borrow on th e 10th, pay the
invoice, and finance at 8% for the next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1 99) x (360 30) = 12.31%

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)

 lOMoAR cPSD| 22592286

xxxv
. Answer; B
Net proceeds in pesos P1,500,000 Divided by net proceeds
percentage 1.00 – 0.1 – 0.15 0.75 Principal amount
P2,000,000

Downloaded by Queenie Osorio (kwini.queenieosorio@gmail.com)