This problem comes from Managerial Accounting a Focus on Ethical Decision Making

Question

This problem comes from Managerial Accounting a Focus on Ethical Decision Making 5th edition, Jackson, Sawyer and Jenkins.

You recently began work at Colt Kitchen Ltd. The company is a well-known distributor of gourmet foods. Like many similar companies, Colt Kitchen currently maintains a relatively large warehouse in which a wide variety of products are stored. Most other food wholesalers also maintain large warehouses, however, Sharon Oblinger, the company’s president, is very concerned about the company’s ability to maintain and sell the freshest products. She has also grown increasingly concerned about the company’s cash management practices. She has accumulated the following inventory data:

Spices $28,000
Coffee and Tea 61.060
Pasta 32,140
Vegetables 108,460
Health Supplements 84,700
Dairy 46,975
Meats 185,610
Personal Products 71,440
Household 88,200
Per Care 15,920

Ken Martin, cofounder and chief strategist, is equally concerned about the company, but he believes that specialty food shops that sell the company’s products expect to b e able to order items from Colt Kitchen and have them shipped immediately. In short, Ken thinks that maintaining an adequate inventory is crucial to the company’s future. Sharon and Ken have set a meeting for late next week to decide on the company’s adoption of a just-in-time inventory management system. Sharon is proposing that inventory be reduced by 80 percent and that warehouse employment be decreased by 30 percent. Currently, the 10 warehouse employees earn an average gross pay of $350 per week.

C. Assume that Colt Kitchen can invest cash that would otherwise be “tied up” in inventory. Calculate the potential interest income if the company were to receive an annual interest rate of 3.5 percent on the cash that would otherwise be invested in the inventory (represented by the 80 percent reduction).

Explanation / Answer

The total amount of money invested in inventory is $722505, and 80% of that would be $578004. If that money were invested with an annual interest rate of 3.5%, you would want to multiply the 80% invested, $578004, by 0.035, giving you an annual interest income of $20230.14. Hope this helps!

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