Question 1(10 marks)

Product used 2,000 units

Carrying cost $2.10
Fixed costs $40.00 per order
Safety stock of 24 units
1.
2.
3.
4.

Calculate EOQ
Determine average inventory
How many orders will be placed in a year
Calculate the total cost of inventory

Question 2 (10 marks)

All sales are on credit and they currently offer a 1% cash discount of which 30% of the
customers take advantage of. They company is considering upping the cash discount to
3% to encourage early payment. They feel that sales will increase by 20% and that 75%
of the customers will take advantage of the new discount. Other benefits of this new offer
is that bad debts are expected to drop from 3% to 1.5% and the average collection period
will drop from 52 days to 38 days. Inventory will increase from 40 days to 60 days.
Current sales 50,000 units at $100 selling price
Cost of goods sold is 70%
Profit margin is 20%
Cost of capital is 15%
Should they change the discount policy?

Question 3 (10 marks)

Conestoga Inc. is looking to develop an asset financing plan and wishes to explore its
options. The firm has $500,000 in temporary current assets, $250,000 in permanent
current assets and $450,000 in capital assets. The company has a tax rate of 40%, long
term financing costs of 15%, short term financing costs of 10% and earnings before
interest and taxes of $250,000.
1) Calculate the cost of financing based on a conservative plan with 80% long term
funds used.
2) Calculate the cost of financing based on an aggressive plan with 30% long term
funds used.
3) Calculate after tax income for both alternatives.

Question 1 ( 10 marks )
Product used in units
Carrying cost
Fixed costs per order
Safety stock in units

2,000
$ 2.10
$ 40.00
24

1) Calculate EOQ
2) Determine average inventory
3) How many oders will be placed in year
4) Calculate the total cost of inventory

1) EOQ =

2
$

2,000 $ 40.00
2.10
138.0

276.0

2) Avg Inventory

276
2

3) # Orders

2,000
276

4) Total Cost

2,000 $ 40.00
276
+
$ 289.83 +

24

162.0

7.25

162.0

2.10

340.23

630.06

Sales Increase
Margin Increase
Current Discount
New Discount

1,000,000

$
$

15,000
135,000

Current Bad Debt

New Bad Debt

$
$

150,000
90,000

Current Inventory
New Inventory

$
$
-$

383,562
986,301
602,740

$
$

712,329
624,658

87,671

Question 2 ( 13 marks )
All sales are on credit and they currently offer a 1% cash discount of which 30% of the customers take advantage of.
They company is considering upping the cash discount to 3% to encourage early payment. They feel that sales will
increase by 20% and that 75% of the customers will take advantage of the new discount. Other benefits of this new offer
is that bad debts are expected to drop from 3% to 1.5% and the average collection period will drop from 52 days to 38
days. Inventory will increase from 40 days to 60 days.
- Current unit sales
- Current sell price per unit
- Cost of goods sold is
- Profit margin is
- Cost of capital is
Should they change the discount policy?

50,000
$ 100.00
70%
20%
15%

Old Discount
New Discount
Sales Increase
Old Bad Debts

1%
3%
20%
3.0%

New Bad Debts

Inventory +

1.5%
20 days

Old A/R
New A/R

30% Take
75% Take

52
38

$ 200,000

Opp Cost at
Old A/R
New A/R

15%

Opp Cost at

15%

Question 3 (10 marks)

-$ 120,000
$

60,000

-$

90,411

13,151

62,740

Conestoga Inc. is looking to develop an asset financing plan and wishes to explore its options. The firm has $500,000
in temporary current assets, $250,000 in permanent current assets and $450,000 in capital assets. The company has a
tax rate of 40%, long term financing costs of 15%, short term financing costs of 10% and earnings before interest and
taxes of $250,000.

1) Calculate the cost of financing based on a conservative plan with 80% long term funds used.
2) Calculate the cost of financing based on an aggressive plan with 30% long term funds used.
3) Calculate after tax income for both alternatives.

Temporary
Permanent
Capital

500,000 LT
250,000 ST
450,000

Total

EBIT
Interest
Total Interest
EBT
Tax
Net Income

15.0%
10.0%

1,200,000

LT
ST

Conservative
250,000
144,000
24,000
168,000
82,000
32,800
49,200

Aggressive
250,000
80.0%
54,000
20.0%
84,000
138,000
112,000
44,800
67,200

30.0%
70.0%