Provide two examples of a carrying cost. Provide two examples of a shortage cost

Question

Provide two examples of a carrying cost.

Provide two examples of a shortage cost.

Dandee Lions, Inc. has a cash balance of $125,000, accounts payable of $250,000, inventory of $205,000, accounts receivable of $350,000, notes payable of $70,000, and accrued wages and taxes of $85,000. How much net working capital does the firm need to fund?

Sow Tire, Inc. has sales of $1,550,000 and cost of goods sold of $1,000,000. The firm had a beginning inventory of $97,000 and an ending inventory of $82,000. What is the length of the days’ sales in inventory?

If a firm has a cash cycle of 55 days and an operating cycle of 80 days, what is its average payment period?

CM Enterprises estimates that it takes, on average, four days for customers’ payments to arrive, two days for the payments to be processed and deposited by the bookkeeping department, and three more days for the checks to clear once they are deposited. What is CM’s collection float?

Suppose that Dunn Industries has annual sales of $3.75 million, cost of goods sold of $1,800,000, average inventories of $1,250,000 and average accounts receivable of $760,000. Assuming that all of Dunn’s sales are on credit, what will be the firm’s operating cycle? (4 points)

Suppose that Ken-Z Art Gallery has annual sales of $920,000, cost of goods sold of $560,000, average inventories of $250,000, average account accounts receivable of $35,000, and an average accounts payable balance of $69,500. Assuming that all of Ken-Z’s sales are on credit, what will be the firm’s cash cycle?

Explanation / Answer

a) (Carrying cost also called holding costs) are costs incurred for carrying inventory. Examples of carrying costs include money tied up in inventory (i.e., lost interest), storage costs, insurance premiums, taxes, inventory obsolescence and spoilage.

b) Costs incurred when an item is out of stock; also called shortage costs. Example of shortage cost include the lost Contribution Margin (CM) on sales, loss of future profit due to loss of goodwill, delays, labor time wastage, and lost production.

c)

D)

.E)

Average payment period means the average period taken by the company in making payments to its creditors. It is computed by dividing the number of working days in a year by creditors turnover ratio. In the current scenario it is 80 days.

F)

G)

H)

Working capital fund: Cash balance     125,000 LESS: Accounts payable (250,000) Less: Notes Payable     (70,000) Less: Accrued wages and taxes     (85,000) ADD: Inventory     205,000 ADD: Account receiable     350,000 Excess Working capital fund available     275,000

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