Lilly Bakery distributes its products to more than 75 restaurants and delis. The
ID: 2791858 • Letter: L
Question
Lilly Bakery distributes its products to more than 75 restaurants and delis. The company’s average collection period is 36 days, and it keeps its inventory for an average of 3 days. What is Lilly’s operating cycle? Lilly’s operating cycle is days.
Mill Street Corporation sells its goods with terms of 5/13 EOM, net 45. What is the implicit cost of the trade credit? (Round intermediate calculations to 4 decimal places, e.g. 1.2541 and final answer to 2 decimal places, e.g. 12.25%.)
%.
Pacific Traders has annual sales of $2,462,000. The firm’s financial manager has determined that using a lockbox will reduce collection time by 3.4 days. If the firm’s opportunity cost on savings is 5.90 percent, what are the savings from using the lockbox? (Do not round intermediate calculations and final answer to 2 decimal places, e.g. 12.25.)
%.
Pacific Traders has annual sales of $2,462,000. The firm’s financial manager has determined that using a lockbox will reduce collection time by 3.4 days. If the firm’s opportunity cost on savings is 5.90 percent, what are the savings from using the lockbox? (Do not round intermediate calculations and final answer to 2 decimal places, e.g. 12.25.)
Explanation / Answer
Answer 1)
DSI =3
DSO = 36
Lilly's operating cycle = DSI + DSO = 36 +3 = 39 days
Answer 2)
Credit term = 5/13 EOM, net 45
Effective annual rate = [(1+ discount / discount price)^(365/days credit) ] -1
= [(1+ 5 / 95)^(365/32)]-1
= 0.795106
Answer 3)
Annual Sales = 2462000
Annual interest rate = 5.9%
collection time saved = 3.4 days
Average daily sales = 2462000/365 = 6745.21
Savings = 6745.21*0.059*3.4 = 1353.09
The firm can save 1353.09
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