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Chapter 7

Problems 7-2. Oscar's checkbook shows a balance of $600. A recent statement from the bank

(received last week) shows that all checks written as of the date of the statement have been paid except numbers 423 and 424, which were for $62and $40, respectively. Since the statement date, checks 425, 426, and 427 have been written for $32, $70, and $44, respectively. There is a 75 percent probability that checks 423 and 424 have been paid by this time. There is a 40 percent probability that checks 424, 426, and 427 have been paid. a. What is the total value of the five checks outstanding? b. What is the expected value of payments for the five checks outstanding? c. What is the difference between parts a and b? This represents a type of

float.

Solution: Oscar's Checkbook

a. $62 + $40 + $32 +70 +44 = $248

b.

Amount Probability check

has cleared Expected

value $62 * 75% $ 46.50 40 * 75% 30.00 32 * 40% 12.80 70 * 40% 28.00 44 * 40% 17.60 $134.90 expected

value of payment for 5 checks outstanding

c. (a – b) = $248.00 – $134.90 = $113.10 float

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7-6. Barney's Antique Shop has annual credit sales of $1,080,000 and an average

collection period of 40 days in 1996. Assume a 360-day year. What is the company's average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Solution: Barney's Antique Shop

day a salescredit 000,3$yearper days 360

salescredit annual 000,080,1$=

$3,000 average

daily credit sales * 40 average

collection period = $120,000 average accounts receivable balance

7-8. Mervyn's Fine Fashions has an average collection period of 40 days. The

accounts receivable balance is $80,000. What is the value of its credit sales?

Solution: Mervyn's Fine Fashion

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$720,000360$2,000salesCredit

$2,000sales/360Credit

40000,80$

360salescredit

360salesCredit

$80,000days 40

salescredit daily AverageReceivable Accounts

period collection Average

=×=

=

=

=

=

7-11. Fisk Corporation is trying to improve its inventory control system and has installed

an on- line computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of $8 per order, and carrying costs of $12.0 per unit. a. What is the economic ordering quantity? b. How many orders will be placed during the year? c. What will the average inventory be? d. What is the total cost of ordering and carrying inventory?

Solution: Fisk Corp.

units 000,120.1$

8$000,752C

2SOEOQ a. =××==

b. 75,000 units/1,000 units = 75 orders c. EOQ/2 = 1,000/2 = 500 units (average inventory) d. 75 orders * $8 ordering cost = $ 600 500 inventory * $1.20 carrying cost per unit = 600 Total costs = $1,200

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