Answer the Following Questions given below
Question 1
Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident.
Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlin made.
Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals.
The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. Molly and Caitlin realized that it was time to get down to business.
To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit.To produce the order, Molly and Caitlin would have to rent industrial facilities for a month, which would cost them $4,000.
a. Calculate Mollycaits' operating breakeven point.
b. Calculate Mollycaits' EBIT on the department store order.
c. If Molly renegotiates the contract at a price of $10.00 per figurine, what will the EBIT be?
d. If the store refuses to pay more than $8.00 per unit but is willing to negotiate quantity, what quantity of figurines will result in an EBIT of $4,000?
e. At this time, Mollycaits come in 15 different varieties. Whereas the average variable cost per unit is $6.00, the actual cost varies from unit to unit.
What recommendation would you have for Molly and Caitlin with regard to pricing and the numbers and types of units that they offer for sale?
Question 2
Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting of $250,000 of
16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%.
a. Using EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS).
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage (DFL).
c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual interest) debt and 3,000 shares of common stock.
Question 3
Stock dividend: Firm Columbia Paper has the following stockholders' equity account. The firm's common stock has a current market price of $30 per share.
| Preferred stock |
######## |
| Common stock (10,000 shares at $2 par) |
20,000 |
| Paid-in capital in excess of par |
2,80,000 |
| Retained earnings |
1,00,000 |
| Total stockholders' equity |
######## |
a. Show the effects on Columbia of a 5% stock dividend.
b. Show the effects of (1) a 10% and (2) a 20% stock dividend.
c. In light of your answers to parts a and b, discuss the effects of stock dividends on stockholders' equity.
Question 4
Multiple changes in cash conversion cycle Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm's annual sales are $3 million. Assume that there is no difference in the investment per dollar of sales in inventory, receivables, and payables, and assume a 365-day year.
a. Calculate the firm's cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion cycle.
b. Find the firm's cash conversion cycle and resource investment requirement if it makes the following changes simultaneously.
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
(3) Extends the average payment period by 10 days.
c. If the firm pays 13% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b?
d. If the annual cost of achieving the profit in part c is $35,000, what action would you recommend to the firm? Why?
Question 5
EOQ analysis Tiger Corporation purchases 1,200,000 units per year of one component. The fixed cost per order is $25.
The annual carrying cost of the item is 27% of its $2 cost.
a. Determine the EOQ if (1) the conditions stated above hold, (2) the order cost is zero rather than $25, and (3) the order cost is $25 but the carrying cost is $0.01.
b. What do your answers illustrate about the EOQ model? Explain.
Question 6
Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender.
The firm's accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is $300,000, of which $120,000 is finished goods. (Note: Assume a 365-day year.)
(1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000.
(2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%.
(3) Citizens' Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% warehousing fee will be levied against the average amount borrowed. Because the loan will be liquidated as inventory is sold, the average loan balance is expected to be $60,000.
a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.
b. Which plan do you recommend? Why?
c. If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?