"7-10. Solution:Marv’s Women’s WearAge of Receivables, April 30, 2004a. (1) (2) (3) (4)Month of Age of Percent ofSales Account Amounts Amount DueApril 0-30 $88,000 40%March 31-60 44,000 20%February 61-90 33,000 15%January 91-120 55,000 25%Total receivables $220,000 100%Accounts receivable b.Average Collection Period = Average daily credit sales $220,000 = $960,000/120 $220,000 = $8,000 = 27.5 days c. Yes, the average collection of 27.5 days is less than 30 days.d. No. The aging schedule provides additional insight that 60percent of the accounts receivable are over 30 days old.e. It goes beyond showing how many days of credit salesaccounts receivables represent, to indicate the distribution ofaccounts receivable between various time frames.S7-11 11. Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of$6 per order, and carrying costs of $2.40 per pipe. a. What is the economic ordering quantity? b. How many orders will be placed during the year? c. What will the average inventory be?7-11. Solution:Nowlin Pipe and Steel Company2SO 2×× 72,000 $6 a.EOQ = = C $2.40 $864,000 = = 360,000 = 600 units $2.40 b. 72,000 units/600 units = 120 ordersc. EOQ/2 = 600/2 = 300 units (average inventory)12. Howe Corporation is trying to improve its inventory control system and has installed anonline computer at its retail stores. Howe anticipates sales of 126,000 units per year, anordering cost of $4 per order, and carrying costs of $1.008 per unit. a. What is the economic ordering quantity? b. How many orders will be placed during the year? c. What will the average inventory be? d. What is the total cost of inventory expected to be?7-12. Solution:Howe Corp.2SO 2×126,000×$4 a. EOQ = = =1,000 unitsC $1.008 b. 126,000 units/1,000 units = 126 ordersS7-12 7-12. (Continued)c. EOQ/2 = 1,000/2 = 500 units (average inventory)d. 126 orders × $4 ordering cost = $ 504500 units × $1.008 carrying cost per unit =504Total costs = $1,00813. (See Problem 12 for basic data.) In the second year, Howe Corporation finds it can reduceordering costs to $1 per order but that carrying costs will stay the same at $1.008 per unit. a. Recompute a, b, c, and d in Problem 12 for the second year. b. Now compare years one and two and explain what happened.7-13. Solution:Howe Corp. (Continued)2SO 2×126,000×$1 a.EOQ = = C $1.008 $252,000 = = 250,000 = 500 units $1.008 126,000 units/500 units = 252 ordersEOQ/2 = 500/2 = 250 units (average inventory)252 orders × $1 ordering cost = $252250 units × $1.008 carrying cost per unit = 252Total costs = $504b. The number of units ordered declines 50%, while the numberof orders doubles. The average inventory and total costs bothdecline by one-half. Notice that the total cost did not declinein equal percentage to the decline in ordering costs. This isbecause the change in EOQ and other variables (½) isproportional to the square root of the change in orderingcosts (¼).S7-13 14. Higgins Athletic Wear has expected sales of 22,500 units a year, carrying costs of $1.50per unit, and an ordering cost of $3 per order. a. What is the economic order quantity? b. What will be the average inventory? The total carrying cost? c. Assume an additional 30 units of inventory will be required as safety stock. What willthe new average inventory be? What will the new total carrying cost be?7-14. Solution:Higgins Athletic Wear2SO 2×× 22,500 $3 a. EOQ = =C $1.50 $135,000 = = 90,000 = 300 units 1.50 b. EOQ/2 = 300/2 = 150 units (average inventory)150 units × $1.50 carrying cost/unit = $225 total carrying costEOQ c. Average inventory = + Safety Stock 2 300 = + 30=150+ 30=180 2 180 inventory × $1.50 carrying cost per year= $270 total carrying costS7-14 15. Dimaggio Sports Equipment, Inc., is considering a switch to level production. Costefficiencies would occur under level production, and aftertax costs would decline by$35,000, but inventory would increase by $400,000. Dimaggio would have to finance theextra inventory at a cost of 10.5 percent. a. Should the company go ahead and switch to level production? b. How low would interest rates need to fall before level production would be feasible?7-15. Solution:Dimaggio Sports Equipment, Inc.a. Inventory increases by $400,000× interest expense 10.5%Increased costs $ 42,000Less: Savings35,000Loss ($ 7,000)Don’t switch to level production. Increased ROI is less thanthe interest cost of more inventory.b. If interest rates fall to 8.75% or less, the switch would befeasible.$35,000 Savings = 8.75%$400,000 increased inventory 16. Johnson Electronics is considering extending trade credit to some customers previouslyconsidered poor risks. Sales will increase by $100,000 if credit is extended to these newcustomers. Of the new accounts receivable generated, 10 percent will prove to beuncollectible. Additional collection costs will be 3 percent of sales, and production andselling costs will be 79 percent of sales. The firm is in the 40 percent tax bracket. a. Compute the incremental income after taxes. b. What will Johnson’s incremental return on sales be if these new credit customers areaccepted? c. If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to servethe new customers, what will Johnson’s incremental return on new averageinvestment be?S7-15 "