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Working Caps
Working Caps
12. If money market rates are expected to average 6% during the year, the net annual benefit loss) from having this service is
= 12,000 –6,000
= P6,000
J. It typically takes Nexus Inc. 8 days to receive and deposit customer remissions. Nexus is considering a lockbox system and anticipates
that the system will reduce the float time to 5 days. Average daily cash receipts are P220,000. The rate of return is 10 percent.
13. What is the reduction in cash balances associated with implementing the system?
The reduction in outstanding cash balances arising from implementing the lockbox system is:
14. What is the rate of return associated with the earlier receipt of the funds?
15. What should be the maximum monthly charge associated with the lockbox proposal?
The maximum monthly charge the company should pay for this lockbox arrangement is therefore:
66,000/12 = 5,500
K. Proxy Company turns out 200 flash drives a day at a cost of P300 per drive for materials and variable conversion cost. It takes the
firm 18 days to convert raw materials into flash drives. Proxie’s usual credit terms extended to its customers is 30 days, and the firm
generally pays its suppliers in 20 days.
16. If the foregoing cycles are constant, what amount of working capital must Proxy Company finance?
Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance.
V. Over the past few years, the marketing department at Goldston & Co has convinced the finance department to permit credit sales to
increasingly marginal customers. Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested that credit
policy be tightened to reduce bad debt losses. Their proposal calls for a more restrictive policy under which sales would fall by 8% but
bad debt losses would drop to 2.6% of revenue. Under the current policy Golston’s revenue forecast is $400 million with a contribution
margin of 38%. Implementing the new credit policy wouldn’t have an effect on contribution margin but would require an additional
$500,000 in annual fixed costs.
27.) Should Goldston implement finance’s new credit policy?
Cash from sales 400M x .94 = 376M Cash from sales 400M x .974 x .92 = 358,432,000
Corporate Expenses 400M x .62 = 248M Corporate Expense 400M x .62 x .92 = 228,160,000
Contribution Margin 128M Contribution Margin 130,272,000
Fixed Cost 0 Fixed Cost 500,000
Operating Income 128M Operating Income 129,772,000
28.) Should the new policy be implemented if bad debts only are only expected to drop to 4% of revenues?