Assignment 4

NOTE: Be sure to follow the Assignment Instructions posted in the Assignments folder in Blackboard.

Chapter 5

1. (6 points) Becker’s Canoe Company sells canoes for $435 per unit, and the variable cost to produce them is $287. The owner estimates that the fixed costs are $4,861,000.
2. a. Compute the break-even point in units (for an odd number of units, round up).
3. b. Use the format from the table below (in dollars) to illustrate the break-even point has been

Sales………………….	____________
– Fixed costs………….	____________
– Total variable costs…	____________
Net profit (loss)……….	____________

 

 

2. The Duck Decoy Company’s income statement for 2016 is as follows:

Duck Decoy Company
Income Statement
For the Year Ended Dec. 31, 2016
Sales (22,000 decoys @ $11 each)	$242,000
Variable costs (22,000 decoys @ $4)	($88,000)
Fixed Costs	($70,000)
EBIT	$84,000
Interest Expense	($14,000)
EBT	$70,000
Income Taxes @ 24%	($16,800)
EAT	$53,200

 

Given this income statement, compute the following: (2 points each)

1. a. Degree of operating leverage.
2. b. Degree of financial leverage.
3. c. Degree of combined leverage.
4. d. Break-even point in units.

 

Chapter 6

3. Doug’s Cycle Shop expects sales next year to be $1,000,000 if the economy is strong, $700,000 if the economy is steady, and $500,000 if the economy is weak. The CFO believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

(2 points)

 

4. Efiant, Inc. makes ATVs that are very popular in the fall and winter season. Units sold are anticipated as:

 

October…………………………………………….. 20,000

November…………………………………………. 40,000

December………………………………………….. 60,000

January…………………………………………….. 50,000

170,000 units

 

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. However, the company decides to go with level production to smooth out its manufacturing costs. The company will still produce the 170,000 items over four months.

1. a. Assuming no inventory at the end of September, what is the ending inventory at the end of each month? Create a table to show the units sold, units produced, the change in inventory, and the ending inventory. (2 points)
2. b. The finished inventory cost is $2,150 per unit and will be financed at the bank at a cost of 6 percent (annual rate). Create another table to show the ending inventory, monthly cost in inventory, financing cost, and the total for the four months? (2 points)
3. Identify some of the impacts to the company of choosing level production over seasonal                      production. (2 points)

 

 

Chapter 7

5. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit? (2 points)
6. What are the 5 C’s of credit that are sometimes used by bankers and other creditors to determine whether a loan will be made? Why is character the most important? (2 points)
7. Donald’s Plumbing Supplies has annual sales of $6,025,000. Sixty percent are on credit. The firm has $585,000 in accounts receivable. Compute the value of the average collection period (be sure to read page 63 regarding days in the year for this calculation). (2 points)

 

 

 

8. Dunlop Tires has expected sales of 24,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per tire. There is no ‘Safety Stock’ in this problem. (Round answers to the nearest whole number). (2 points each)
9. a. What is the economic ordering quantity?
10. b. How many orders will be placed during the year?
11. c. What will the average inventory be?

 

9. Deft Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $2,000,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 30 percent tax bracket. (1 point each)
10. a. Compute the incremental income after taxes.
11. b. What will the incremental return on sales be if these new credit customers are accepted?

 

Chapter 8

10. Compute the cost of not taking the following cash discounts. (2 points each)
11. 2/10, net 30.
12. 2/15, net 40.
13. 3/10, net 45.
14. 3/20, net 60.

 

 

11. Donna’s Dress Shop can borrow from its bank at 7 percent to take a cash discount. The terms of the cash discount are 2/20, net 60. Should the firm borrow the funds? (2 points)
12. DesArc Bank will lend you $2,000 for 90 days at a cost of $58 interest. What is your effective rate of interest? (2 points)

 

13. DoYourSelfaFavor Budget Pay Day Lenders will lend $250 for 18 days at a cost of $18 interest. What is the effective rate of interest? (2 points)