16.1 On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clear. What is the clinic's average net float?
16.2 Drugs 'R Us operates a mail order pharmaceutical business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment,from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of ten local depository banks and a concentration bank in San Francisco would cost $6,500 per month. Under this system, customers' checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm can earn 10 percent on marketable securities and that there are 260 working days and hence 260 transfers from each of the ten lockbox locations per year.
a. What is the total annual cost of operating the lockbox system?
b. What is the dollar benefit of the system to Drugs'R Us?
c. Should the firm initiate the lockbox system?
16.4 Langley Clinics, Inc. buys $400,000 in medical supplies a year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual percentage cost of the costly trade credit?
d. Should Langley replace its trade credit with the bank loan? Explain your answer.
e. If the bank loan is used, how much of the trade credit should be replaced?
16.5 Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts; 40 percent pay on the thirtieth day; and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.)
a. What is the firm's average collection period?
b. What is the firm's current receivables balance?
c. What would be the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the 30th day?
d. Suppose that the firm's cost of carrying receivables was 8 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of the receivables had to be financed.)
17.1 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
16.2 Drugs 'R Us operates a mail order pharmaceutical business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment,from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of ten local depository banks and a concentration bank in San Francisco would cost $6,500 per month. Under this system, customers' checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm can earn 10 percent on marketable securities and that there are 260 working days and hence 260 transfers from each of the ten lockbox locations per year.
a. What is the total annual cost of operating the lockbox system?
b. What is the dollar benefit of the system to Drugs'R Us?
c. Should the firm initiate the lockbox system?
16.4 Langley Clinics, Inc. buys $400,000 in medical supplies a year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual percentage cost of the costly trade credit?
d. Should Langley replace its trade credit with the bank loan? Explain your answer.
e. If the bank loan is used, how much of the trade credit should be replaced?
16.5 Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts; 40 percent pay on the thirtieth day; and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.)
a. What is the firm's average collection period?
b. What is the firm's current receivables balance?
c. What would be the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the 30th day?
d. Suppose that the firm's cost of carrying receivables was 8 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of the receivables had to be financed.)
17.1 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
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