1.

Cash conversion cycle: Hurkin Manufacturing Company pays accounts payable on the tenth
day after purchase. The average collection period is 30 days, and the average age of
inventory is 40 days. The firm currently has annual sales of about $18 million and purchases
of $14 million. The firm is considering a plan that would stretch its accounts payable by 20
days. If the firm pays 12% per year for its resource investment, what annual savings can it
realize by this plan? Assume a 360- day year.

Solution:

2. EOQ analysis: Thompson Paint Company uses 60,000 gallons of pigment per year. The cost
of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1
per gallon per year. The firm uses pigment at a constant rate every day throughout the year.
a. Calculate the EOQ.
 b. Assuming that it takes 20 days to receive an order once it has been placed, determine
the reorder point in terms of gallons of pigment. (Note: Use a 365-day year.)

Solution:

3. Relaxing credit standards: Regency Rug Repair Company is trying to decide whether it
should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of
$32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and
the variable cost per unit is $28. Regency expects that if it does relax its credit standards, the
average collection period will increase to 48 days and that bad debts will increase to 11/2%
of sales. Sales will increase by 4,000 repairs per year. If the firm has a required rate of return
on equal-risk investments of 14%, what recommendation would you give the firm? Use your
analysis to justify your answer. (Note: Use a 365-day year.)
Solution: