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Exam 20: Credit and Inventory Management

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Question 21

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Town Hardware sells goods on credit with payment due 30 days after purchase.If payment is not received by the 30^th day,the store mails a friendly reminder to the customer.If payment is not received by the 45^th day,the store calls the customer and requests payment and also stops offering credit to that customer.These procedures are referred to as the store's:

A) customer service policy.
B) credit policy.
C) collection policy.
D) payables policy.
E) disbursements policy.

F) All of the above
G) None of the above

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Question 22

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Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer? I.seller's operating cycle II.customer's operating cycle III.seller's inventory period IV.customer's inventory period

A) I and II
B) II and III
C) III and IV
D) II and IV
E) I and IV

F) D) and E)
G) C) and E)

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Question 23

Multiple Choice

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You are trying to attract new customers that you feel could become repeat customers.The average selling price of your products is $69 each with a $41 per unit variable cost.The monthly interest rate is 1.5 percent.Your experience tells you that 8 percent of these customers will never pay their bill.What is the value of a new customer who does not default on his or her bill?

Any written proof that a customer owes you money for goods or services provided is referred to as a(n) :

You are considering switching from an all cash credit policy to a net 30 credit policy.You do not expect the switch to affect either your sales quantity or your sales price.Ignoring interest and assuming that every month has 30 days,your net present value of the switch will be equal to:

Your current sales consist of 32 units per month at a price of $225 a unit.You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy.If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit.If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate.The monthly interest rate is 1.5 percent.What is the net present value of the proposed credit policy switch?

Music City,Inc.has an average collection period of 62 days.Its average daily investment in receivables is $50,000.What are the annual credit sales?

The Green Hornet sells earnings forecasts for international securities.Its credit terms are 2/10,net 30.Based on experience,55 percent of all customers will take the discount.The firm sells 2,700 forecasts every month at a price of $1,100 each.What is the firm's average balance sheet amount in accounts receivable?

Geoff Industries offers its credit customers a 2 percent discount if they pay within 10 days.This discount is referred to as a:

Which one of the following time periods is included in the accounts receivable period but not in the cash collection period?

Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service.This 30-day period is referred to as the:

One of the best selling items L.T.Ten offers sells for $9.99 a unit.The variable cost per unit is $6.38 and the carrying cost per unit is $1.12.The firm sells 6,500 of these units each year.The fixed cost to order this item is $75.What is the economic order quantity?

A supplier grants your firm credit terms of 2/10,net 40.What is the effective annual rate of the discount if the firm purchases $4,800 worth of merchandise?

A just-in-time inventory system: I.when implemented properly reduces the cost of inventory to zero. II.increases the inventory turnover rate. III.is sufficient to handle immediate production needs. IV.minimizes the costs of holding inventory.

You are trying to attract new customers that you feel could become repeat customers.The average price of your product is $619 per unit with a $435 variable cost per unit.The monthly interest rate is 1.8 percent.Your experience tells you that 9 percent of these customers will never pay their bill.Should you offer credit terms of net 30 to attract these potential customers? Why or why not?

Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry.A new customer has placed an order for eight high-bypass turbine engines,which increase fuel economy.The variable cost is $1.7 million per unit,and the credit price is $2.1 million each.Credit is extended for one period.Based on historical experience,payment for about 1 out of every 240 such orders is never collected.The required return is 3.2 percent per period.What is the NPV per unit if this is a one-time order?

At the optimal order quantity size,the:

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?

Jillian was recently hired by a major retail store.Her job is to determine the probability that individual customers will fail to pay for their charge sales.Jillian's job best relates to which one of the following?