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Working Capital Management A.
I. Working Capital Management
A. You run a business, located in a populous Western United States mountain community that sells outdoor adventure equipment such as backpacks and high-altitude clothing, and other camping and climbing gear. One of your prominent suppliers of backpacks is offering a significant discount on the new season model of backpack that is particularly popular to climbers in the area and throughout the United States. They will offer a 25% discount on the usual wholesale cost of these backpacks to your business, however you must purchase two times the usual number of backpacks in a single order (volume purchasing). 1. Without worrying about actual numbers, briefly describe the advantages and disadvantages of taking this discount on the high-volume purchase, particularly from the perspective of managing your working capital.
2. Describe what Economic Order Quantity is and what information you need to compute it.
3. Describe the Just-in-Time model of ordering inventory
4. Do you think these models work for someone who runs a business that sells such perishable items and goods as a restaurant?
B. Your ORV and Snowmobile Company gives terms on sales of 2/10, net 30. You have annual credit sales of $500,000 and average accounts receivable of $60,000.
1. What is your accounts receivable turnover? Be sure to describe precisely what this number means.
2. What is your average daily collection? Be specific.
3. What is the relationship between the terms that your business gives and your average daily collection? Is there anything your business needs to do in response to this relationship?
4. Now assume you have accounts receivable of $100,000, what is your average accounts receivable turnover and average collection period? What should you do, if anything?
C. You are managing a business that stocks backpacks for extreme adventure use. You have one purchasing agent who receives an annual salary of $45,000. She processes 2,500 purchase requests for backpacks per year. Average backpack inventory in storage is $75,000, and the total cost of running the backpack portion of the warehouse is $15,000. You are told that your company purchases 1,000 backpacks per year at a cost of $150.00 per backpack.
1. Using the Economic Order Quantity Formula (EOQ), how many backpacks should be ordered at one time?
D. Jerry's and Mo's Ski Shop receives the following trade discounts for a particular type of downhill ski: 35/25/15. The vendor's price list indicates that 35% off list price is for purchase the skis in quantities of 25 pair or more; 25% off list price is for assembling the skis and bindings for customers; and 15% is for sales promotion and local advertising.
1. If the manufacturer's list price is $450 per pair, what should Jerry's and Mo's Ski Shop pay for each pair if they order 30 pairs at a time, assembles the skis with the bindings, and displays and advertises them?
2. What is Jerry's and Mo's Ski Shop's single equivalent discount rate?
3. How much will Jerry's and Mo's Ski Shop pay the manufacturer for each bike if they order 5 pairs of skis at a time, and takes advantage of all other discounts?
4. If Jerry's and Mo's Ski Shop is given terms of 4/15, n/30, what does this mean?
5. If Jerry's and Mo's Ski Shop pays by day 15, how much will they pay the manufacturer for the order of 30 pairs of skis.
