You as a Student As a fund-raiser, the pep band at Melrose University sells T-sh

Question

You as a Student

As a fund-raiser, the pep band at Melrose University sells T-shirts fans can wear when attending the school’s 12 home basketball games. As the band’s business manager, you must choose among several options for ordering and selling the T-shirts.

1.Place a single order in October large enough to last the entire season. The band must pay for the shirts in full when the order is placed. A 5 percent quantity discount applies to this option.

2.Place a series of small orders, as needed, throughout the season. Again, payment in full is due when the order is submitted. No discount applies to this option.

3.Have band members sell shirts directly to members of the student body. Cash is collected immediately as sales are made.

4.Sell all of the T-shirts through the university bookstore. The bookstore would receive a 6 percent commission on total sales and would remit to the band its share of the proceeds in a lump-sum payment at the end of the season.

a.Describe which combination of options would give the pep band the shortest operating cycle.

b.Describe which combination of options would give the pep band the longest operating cycle.

c.Discuss briefly the advantages and disadvantages of each option.

Explanation / Answer

a.

Option 2 enables the band to have the least possible amount of cash invested in inventory at any given time throughout the basketball season.

Option 3 enables the band to convert sales into cash immediately as shirts are sold. So, the combination of option 2 and option 3 results in the shortest operating cycle.

b.

Option 1 results in the band having an excessive amount invested in inventory early in the season.

Option 4 requires that the band wait until the season to collect its account receivable from the bookstore. So, this combination results in the longest operating cycle.

c.

Option 1:

Advantage: A 5% purchase discount applies to the purchase.

Disadvantages: A large amount of cash is invested in inventory early in the season. For an entire season of inventory the band must pay in advance. Ordering inventory for an entire season causes high risk of purchasing too many or too few T-shirts.

Option 2:
Advantages: T-shirts are ordered only when inventory levels become depleted. Small amount of cash is invested throughout the season. Ordering the required shirts reduces the risk of purchasing too many or too few.

Disadvantage: A 5% purchase riscount does not apply.

Option 3:

Advantages: Cash is collected immediately and the band receives 100% of all sales proceeds.

Disadvantages: Maintaining control over cash receipts and inventory is potentially more difficult.

Option 4:

Advantages: Control over cash receipts and inventory is maintained by the bookstore. The bookstore is a high trafc area that distributes to students, alumni, and visitors.

Disadvantages: The bookstore earns a 6% sales commission so that the band receives only 94% of the total proceeds.The band must wait the entire year before the bookstore settles its account. Hence, the band may experience difculty in paying for the inventory.

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