F200 Assignment (Problem Set) Three with suggested solutions (70 points possible)

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Emerald Bates
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1 F200 Assignment (Problem Set) Three with suggested solutions (70 points possible) IMPORTANT: Please review instructions for Assignments on the F200 Syllabus before completing. ALSO: PLEASE PUT YOUR NAME ON YOUR WORK! A look at the Balance sheet and Income Statement of Steeple, Inc. in 2010 yields the following information (in thousands): Item Beginning Balance Ending Balance Accounts Receivable $4,155 a. $4,650 Accounts Payable $5,200 b. $5,750 Inventory $2,150 3,150 Credit Sales $57,450 COGS 45,100 c. 1 (10 points possible) the operating cycle of Steeple, Inc. SOLUTION 1. OPERATING CYCLE Operating Cycle = Inventory Period + Receivables Period Inventory Period = 365/Inventory Turnover Inventory Turnover = COGS / Average Inventory Average Inventory = (Beg Inv + End Inv) / 2 Inventory Period = 365 / [45,100/([2, ,150]/2)] Inventory Period = days Receivables Period = 365 / Receivables Turnover Receivables Turnover = Credit Sales / Average Receivables Average Receivables = (Beg Rec + End Rec) / 2 Receivables Period = 365 / [57,450/([4, ,650]/2)] Receivables Period = days OPERATING CYCLE = = DAYS 2 (10 points possible) the cash conversion cycle of Steeple, In. CASH CONVERSION CYCLE Cash conversion The cash conversion cycle calculates the time it takes to convert inventory into cash. It is composed of three categories: days sales outstanding, days payable outstanding and days inventory outstanding. Days sales outstanding is the amount of time a company takes, on average, to collect bills. Days payable outstanding is a firm's average period of time to pay bills. Days inventory outstanding is the amount of time, on average, a firm takes to convert inventory to sales. CCC = Operating Cycle Payables Deferral Period Payables Period = 365 / Payables Turnover Payables Turnover = COGS / Average Payables Average Payables = (Beg Pay + End Pay) / 2 Payables Period = 365 / [45,100/([ ]/2)]

2 Payables Period = days CCC = = 5.1 DAYS Use the following information to answer questions 3 5 below. Jimmy & Timmy s Corp (JTC) have annual credit sales of $255,000. Their credit terms are 2/18, net (5 points possible) If 50% of their customers take the discount and pay on day 18 and 50% pay on day 30, what is their investment in Accounts Receivable? (Assume a 360-day year.) a. Accounts Receivable = (Average Daily Sales)(Average Collection Period) b. Average Collection Period = (.5)(18) + (.5)(30) = 24 days c. Average Daily Sales = (255,000 / 360) = d. Accounts Receivable = (24)(708.33) = $17,000 4 (5 points possible) If a new and aggressive competitor enters their market area, what is likely to happen to the figure you calculated in #3, all else the same? Will it be larger? Smaller? Not change? Be sure to fully but concisely state your reasoning. (Answers on this question will vary considerably) a. Generally, one way that firms respond to tough competition is to loosen credit terms making the Average Collection Period longer. b. All else the same, the longer the Average Collection Period, the higher the investment in Account Receivable. Thus, competition generally increases the firm s investment in Accounts Receivable. 5 (5 points possible) Assume that, in response to rising interest rates, JTC s main customers tighten credit terms. (Put another way, JTCs customers will now require earlier payment from their customers.) All else the same, what effect will this likely have on JTC s investment in Accounts Receivable? Please be sure to fully explain your reasoning in a concise fashion. (Answers on this question will vary considerably) Part of the reason for granting credit is to help your customer finance their Operating Cycle (thus encouraging them to do business with you). If your customers tighten their credit terms, they are reducing their Average Collection Period and thus their Operating Cycle If your credit terms are based in some way upon the Operating Cycle of your customers, a shorter Operating Cycle suggests tightening of credit to your customers as well. The shorter the credit period, the smaller the investment in Accounts Receivable all else the same. Thus, rising interest rates and general tightening of credit usually reduces a firm s investment in Accounts Receivable. (Note: for 4 & 5 there are no calculations required.)

3 6. The Goode and Cooke Company produces several models of frying pans. There is little difference in the production time required for the various models; the plant is designed to produce 160 frying pans per eight-hour shift, and there are two shifts per working day. However, the plant does not operate for the full eight hours: the employees take two 12- minute breaks in each shift, one in the first four hours and one in the second four hours; two hours per week are devoted to cleaning the factory and performing maintenance on the machines; one four-hour period every four weeks is devoted to the meeting of the quality circle. The plant usually produces about 3,500 frying pans per four-week period. You may ignore holidays in solving this problem. The selling price of the product is $ The variable costs per unit are: Labor $60.25 Raw material Purchased component Variable overhead The fixed costs total $300,000 per year. Perform a breakeven analysis of this company. a. What is the actual output? (5 pts) b. What is the revenue at the breakeven point? (5 pts) c. Estimate the profit when 9,000 units of the product are sold in a year. (5 pts) 7. The Lade & Bach Company produces office chairs. The price of the chairs is $99.75 and the variable cost per chair is $ The following fixed costs are incurred: Depreciation of plant and equipment per year $20,000 Property taxes per year 12,000 Manager's salary and fringe benefits per month 5,200 Perform a breakeven analysis of this company: a. What is the breakeven point in number of chairs? (5 pts) b. How many chairs must be sold for the company to make $75,000 in a year? (5 pts) 8. (One step beyond) PC Fun & Games, Inc., produces a game for personal computers on a CD-ROM disk, which is entitled: Armageddon, the Final Battle. The company sells the disk to software retailers for $20.00, each, with a 5% discount for orders of 100 copies or more; virtually every retailer takes the discount. The variable costs of producing the disks are low, totaling only $7.00 each for the blank disk onto which the game is copied, the wages of the machine operator, and the packaging. The game has become a best seller, and the production manager must plan to expand the capacity of the plant to turn out CD-ROM disks. CD-ROM disks are produced on a machine which makes copies of a master disk, one at a time. Each copy takes fifteen minutes, which includes inserting the blank disk, imprinting the game, and removing the finished

4 disk. At present, the Company has four machines; each machine cost $80,000 and has a service life of five years. The Company operates two eight-hour shifts per day, 50 weeks per year, and the machines require servicing and adjustments for one hour every day. New machines can be purchased for $85,000. They also have a service life of five years and require one hour of servicing, but they can make copies in ten minutes. Because of the savings in copying time, the variable cost will drop to $6.00 per disk. a. What is the annual depreciation expense of one present machine? (Use straight line depreciation expense = cost/service life.) (5 pts) b. What is the present breakeven point? (5 pts) Solutions 6. a. Actual output = 3,500 frying pans. b. Revenue at the break-even point = 4000(199.95) = $799,800. c. Profit at 9,000 units = 75(9000) = $375, a. Breakeven = FC/(R - VC) = 94400/50 = 1,888 chairs. b. Number of chairs = (SP + FC)/(R - VC) = ( )/50 = 3,388 chairs.

5 8 a. Depreciation = cost/service life = $80,000/5 yrs. = $16,000. b. Breakeven= FC/(R - VC) = 4($16,000)/($19 - $7) = 5,333disks.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. Performance Pillar. P1 Performance Operations. Wednesday 27 August 2014

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. Performance Pillar P1 Performance Operations Instructions to candidates Wednesday 27 August 2014 You are allowed three hours to answer this