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Exam 20: Credit and Inventory Management

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Question 161

Multiple Choice

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Thomas Metal Works produces specialty products which are sold to one-time customers. The variable cost per unit is $776 and the sales price per unit is $949. The monthly interest rate is 1 percent. Management believes that 10 percent of any credit sales will be uncollectible. The firm _____ grant credit because the net present value of a sale is _____.

A) should; $70
B) should; $84
C) should not; -$136
D) should not; -$89
E) should not; -$47

F) A) and E)
G) None of the above

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Question 162

Multiple Choice

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You are considering setting up a booth at a street fair in a town not far from where you are located. Any sale you make will be a one-time sale. There is only a 50 percent chance that you will collect your money on a credit sale. The product you want to sell has a variable cost of $3.90 and a sales price of $5.00. The monthly interest rate is 1.5 percent. Should you offer people 30 days to pay? Why or why not?

A) Yes; because you will earn $.98 on every credit sale you make.
B) Yes; because you will earn $1.44 on every credit sale you make.
C) No; because the net present value of the potential sale is -$1.44.
D) No; because the net present value of the potential sale is -$.98.
E) It doesn't matter; because the present value of the potential sale is $0.

F) C) and D)
G) A) and B)

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Question 163

Multiple Choice

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You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 40 percent chance that this person will never pay you. The sales price of the item the customer wants to buy is $249. Your variable cost on that item is $174 and your monthly interest rate is 1.5 percent. Should you grant credit to this customer? Why or why not?

A cash discount should be considered when deciding whether or not you should offer credit to customers.

The Mix-It-Up Company is considering changing its credit policy. The company has compiled the following information: What is the present value of the credit policy change using the One-Shot Approach?

If a seller requires a credit commitment from a customer before goods are delivered, a(n) ________________ is in order.

Define and briefly discuss the ABC, EOQ, materials requirements planning (derived demand), and just-in-time inventory management systems. When is each appropriate?

Suzie's Kitchen sells major kitchen appliances. The Kitchen Dollar provides financing strictly to buyers of Suzie's appliances. The Kitchen Dollar is a wholly owned subsidiary of Suzie's Kitchen. The Kitchen Dollar is called a:

Average collection period/average daily sales correctly specifies the level of the firm's receivables balance.

How might the state of the economy affect the credit policy of a firm?

A computerized system for setting raw material inventory levels that starts with projecting the number of finished goods to be manufactured is generally referred to as:

Bhattia Inc. has credit terms of 2/15, net 60. Based on experience, 70% of all customers will take the discount. Given this information, calculate average collection period.

The terms of sale generally include all of the following EXCEPT the:

Which of the following is the best definition of a credit instrument.

The Dress Designer uses 15,000 zippers a year in its production process. Currently, it purchases 1,000 zippers at a time and replenishes its inventory when it is depleted. The carrying cost per zipper is $.39. The fixed order cost is $35. How should The Dress Designer change its order quantity?

Which one of the following statements generally applies to the credit period?

A firm revises its credit policy and begins selling all goods for cash only, no credit. It will likely experience an acceleration in collection of revenues due to the __________ effects of its credit policy.

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5'. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What is the economic order quantity (EOQ) ?

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is contingent upon the sale of new homes.

One effect of granting credit to customers is that both the cost of default and the cost of discounts must be considered before granting credit.