Question

5. Hope Corporation has the following data: P70 45 Selling price Variable cost per unit Annual credit sales in units Collection period Rate of return 50,400 30 days 20% Hope Corporation is considering easing its credit standa 4rd. If it does, sales will increase by 25%; collection period will increase to 45 days; bad debts are anticipated to be 4% of the incremental sales; and collection costs will increase by P31,645. If the proposed relaxation in credit standards is implemented, what is the net benefit (loss) for Hope Corporation? Use 360 days a. P215,000 b. P 315,000 C. (P33,075) d. (P100,000) Nos, 6 to 8 are based on the following information: Faith Company sells cellphone cases which it buys from a local manufacturer. Faith sells 24,000 cases evenly throughout the year. The cost of carrying one unit in inventory for one year is P11.52 and the order cost per order is P38 40. & What is the economic order quantity? a. 200 b. 283 c. 400 d. 625 9. If Faith would buy in economic order quantities, how much is the total order cost? a. P921,600 b. P460,800 c. P76,800 d. P2,304 10. If Faith would buy in economic quantities, what is the total inventory carrying cost? a. P2,304 b. P23,040 c. P138,240 d. P276,480

Answer 1

Selling price	70
Variable cost per unit	45
Contribution	25
Annual sale	50,400
Increase	25%
Incremental sale	12,600
Incremental contribution	Incremental sale unit * contribution per unit
Incremental contribution	12600*25
Incremental contribution	315,000
Bad debt=	Incremental sale * 4%
Bad debt=	(12600*70)*4%
Bad debt=	35,280
Additional collection cost	31,645
Interest cost
Collection period period	30
Collection period proposed	45
Days in year	360
Interest rate	20%
Average investment earlier	(Old sale * Cost)*Collection period/days in the year
Average investment earlier	=(50400*45)*30/360
Average investment earlier	189,000
Average investment proposed	(New sale * Cost)*Collection period/days in the year
Average investment proposed	=(50400+12600)*45)*45/360
Average investment proposed	354,375
Interest cost	=(354375-189000)*20%
Interest cost	33,075
Computation of final gain or loss
Additional contribution	315,000
Less: additional collection cost	(31,645)
Less: bad debt cost	(35,280)
Less: the additional interest cost	(33,075)
Additional benefit	215,000
hence option A is correct

Solution 2

Economic Order Quantity	=(2*Annual Demand*Cost of placing 1 order/Cost of handing per unit per year)^(1/2)
Annual Demand	24000
Cost of placing 1 order	$     38.40
Storage cost	$     11.52
Solution to 1
Putting all these factors in EOQ formula	=(2*24000*38.4/11.52)^(1/2)
Economic Order quantity	400
Solution to 2
Total No of orders	=24000/400	60
So a total of 60 orders will be placed
Solution to 3
Average Inventory	=400/2	200
Solution to 4
Annual ordering cost	Total no of orders * order cost per unit
	=60*38.4	$2,304.00
Annual holding cost	EOQ*Annual holding cost/2
	=400*11.52/2	$2,304.00