Bracelet Blanks, Inc. (BB) generated $43,803,000 in sales (all on credit) during

Question

Bracelet Blanks, Inc. (BB) generated $43,803,000 in sales (all on credit) during 2010. The cost of goods sold was 57% of that total. Accounts receivable totaled $3,240,222, inventory totaled $842,020, and accounts payable totaled $1,826,070.

Read and address the following points and seperate each answer by number:

1. Calculate BB’s current cash conversion cycle.

2. BB currently uses 3,000 ingots of aluminum each year to manufacture bracelet blanks. The order cost (including shipping) is $5,000 per order, and carrying costs are $75 per unit per year. Determine the economic order quantity, the amount of safety stock, and the reorder point for aluminum ingots assuming there is a 1-week lead time and the firm would like a safety stock of 3%.

3. In an attempt to boost sales, BB is considering relaxing its credit standards by extending more credit to small firms. BB charges $1.50 per unit. Variable costs are $0.5126 per unit and fixed costs are $10,000,000 per year. The relaxation of credit standards is expected to result in a 3.8% increase in sales (the firm has sufficient excess capacity to handle the increase) as well as an increase of three days in the average collection period. They also expect bad debts to rise from the current level of 0% to 0.5% of sales. Assuming that BB requires a 13% return on investments of this type, should the firm relax its credit standards? Explain.

4. Additionally, BB offers its credit customers terms of net 30. However, it is considering changing the terms to 20/10 net 30 in an attempt to reduce the amount of time it takes to collect its accounts receivable. The firm believes this change alone would decrease the average collection period by five days. BB also expects that 63% of its customers will elect to pay within the discount period and that the increased attractiveness of the terms will increase sales by 1% a year. It is not expected that bad debts will change from the current level of 0% as a result of this change in terms. BB’s opportunity cost of funds invested in accounts receivable is 10%. Should the firm offer the cash discount? Explain. Evaluate this scenario separately from the one described in part d.

Explanation / Answer

Part 1

Sales in usd 43803000 Cost of sales in usd 24967710 Inventory in usd 842000 Receivables in usd 3240222 Account payable in usd 1826070 Days sales in inventory in days 12.31 (inventory*365/cost of goods sold) Collection period in days 27.00 (Receivable*365/sales) Creditors ageing in days 26.70 (accpunts payable*365/cost of goods sold) Cash conversion cycle in days 12.61 (Days sales in inventory+collection period - Creditors ageing)

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