Quick Quiz 1

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1		Which of the following statements is false?
			A)	Whenever credit is extended to a new customer who would not otherwise pay cash, the amount the seller has at risk is the price the customer pays.
			B)	For individual items, by convention, the invoice date is usually the shipping date or the billing date, not the date the buyer receives the goods or the bill.
			C)	A cash discount is typically intended to be an incentive to pay early.
			D)	All else the same, firms with higher markups will tend to have more flexible credit terms.
			E)	By extending credit, a firm typically increases its cash flow through increased gross profits.
2		A __________ factor of credit policy effects occurs when a firm that institutes changes in its existing credit policy finds that, as a result, some of its customers choose to pay early to take advantage of the new terms.
			A)	cost of debt
			B)	cost
			C)	cash discount
			D)	probability of nonpayment
			E)	revenue
3		An automobile tire would be considered __________ inventory to an automobile manufacturer and __________ inventory to a tire manufacturer.
			A)	raw materials; finished goods
			B)	finished goods; work-in-progress
			C)	work-in-progress; raw materials
			D)	finished goods; raw materials
			E)	raw materials; work-in-progress

Use the following information to answer the next two questions:
Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5¢. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25.

4		What is the economic order quantity (EOQ)?
			A)	4,502 units
			B)	5,193 units
			C)	5,492 units
			D)	6,573 units
			E)	6,600 units
5		What are the total restocking costs using the EOQ?
			A)	$45
			B)	$164
			C)	$90
			D)	$390
			E)	$300
6		Karloff Medical Supply maintains an average inventory of 2,000 human skulls for sale to medical schools and filmmakers. The carrying cost per skull per year is estimated to be $5. Boris places an order for 10,000 skulls on the first of each month and the order cost is $75. What are the total carrying costs using the EOQ?
			A)	$4,102
			B)	$3,184
			C)	$5,169
			D)	$4,981
			E)	$4,743
7		Your company purchased $10,000 worth of inventory January 2nd on credit. The terms of sale are 3/15 net 45. What is the effective annual interest rate if you pay the full amount in 45 days?
			A)	74.3%
			B)	44.9%
			C)	37.6%
			D)	28.0%
			E)	3.1%
8		Regardless of the day on which the sale is made, the Propellerhead Software Co. dates the invoice as the 15th of the month. The firm, therefore, must employ __________ terms.
			A)	ROG
			B)	DOS
			C)	MOM
			D)	EOM
			E)	LOP
9		Your company purchased $10,000 worth of inventory on January 2nd on credit. The terms of the sale are 2/10 net 30. How much will you pay if payment is made on January 11th?
			A)	$8,750
			B)	$9,000
			C)	$9,500
			D)	$10,000
			E)	$9,800
10		Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the NPV of granting credit?
			A)	$1,725
			B)	$1,575
			C)	$1,147
			D)	- $133
			E)	-$17,025