26. Which of the following is not a cost of carrying inventory? a. breakage and

Question

26. Which of the following is not a cost of carrying inventory?

a. breakage and theft b. obsolescence c. financing and storage costs d. slower inventory turnover

27. A firm has a $5 million revolving credit agreement with its bank at 1.5% over prime with a commitment fee of .5% unborrowed balance. What is the total cost of borrowing in a month when the prime rate is 8% if the firm borrowed $2 million prior to the beginning of the month and takes down an additional $1 million two thirds through the month on the 21st? (Correct answers may differ due to rounding.)

a. $21,875 b. $20,833 c. $20,417 d. $19,583

Explanation / Answer

Answer for question no.26:

Answer is Breakage and theft is an extraordinary cost and cannot be included in cost of carrying inventory.

Answer for quesion no.27:

Given prime rate=8%

Interest rate over prime rate=1.5%.

Effective interest rate on use of funds=8%+1.5%.

=9.5%.

Commitment fee over the unused balance=.5%.

Funds used through out the month=$2,000,000*9.5%*1/12

=$15,833.33------------(1)

$2,000,000 remains unused through out the month, therefore, unused fund cost=$2000000*.05%*1/12

=$833.33---------(2)

Remaining $1,000,000 is used for 10 days during the month. Therefore, interest cost for 10 days=$1,000,000*9.5%*(10/360).

=$2,638.89-----------(3)

Unused cost of these funds during the month =$1,000,000*0.5%*(20/360)

=$277.78.------------(4)

Total cost of the revolving credit=(1)+(2)+(3)+(4)

=$19,583.33

Answer is option d.

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