Reference no: EM13701097

6-1. Gary's Pipe and Steel compnay expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,00 if the economy is weak. Gary believes there is a 20% probability the economy will be strong, a 50% probability of a steady economy, and a 30% probability of a weak economy. What is the expected level of sales for the next year?

6-3. Tobin Supplies Company expects sales next year to be $500,000. Invetory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12% with a 40% dividend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

6-5. Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as:

October 1,250
November 2,250
December 4,500
January 3,500
11,500 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, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 per month.
a. What is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.
b. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12%, what is the monthly financing cost and the total for the four months? (Use 1% or the monthly rate)

6-7. Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12% interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.75% interest in the first year and 13.55% interest the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?

6-8. Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60% percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75% interest in the first year, 13.25% interest in the second year, and 10.15% interest in the third year. Determine the total interst cost under each plan. Which is less costly?

7-2. Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.
a. If Neon Light Company has $2.25 million per day in collections and $1.05 million per day in disburesments, how many dollars will the cash management system free up?
b. If Neon Light Company can earn 6% per annm on freed-up funds, how much will the income be?
c. If the total cost of the new system is $400,000, should it be implemented?

7-5. Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.

7-9. Barney's Antique Shop has annual credit sales of $1,620,000 and accounts receivable balance of $157,500. Calculate the average collection period. (Use 360 days a year)

7-16. Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,000, but inventory would increase by $300,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5%.
a. Determine the extra cost or savings of switching over to level production. Should the company go ahead and switch to level production?
b. How low would interest rates need to fall before level production would be feasible?

7-17. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5% will provide to be uncollectible. Additional collection costs will be 2% of sales, and production and selling costs will be 74% of sales. The firm is in the 35% tax bracket.
a. Compute the incremental income after taxes.
b. What will Johnson's incremental return on sales be if these new credit customers are applied?
c. If the receivable turnover ratio is 3 to 1 and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be?