Question

Trade Credit

The Thompson Corporation projects an increase in sales from $1 million to $3 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 30 days - paying in 60 days and thus becoming 30 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? Round your answers to two decimal places. Assume 365 days in year for your calculations. Do not round intermediate calculations.

Nominal cost	%
Effective cost	%

The Thompson Corporation last year reported sales of $126 million, cost of goods sold (COGS) of $105 and an inventory turnover ratio of 5. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 7 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Round your answer to the nearest dollar.

$  

Answer 1

2.

Sales = $126 million

Cost of goods sold = $105 million

Inventory turnover = 5

Value of inventory = $105 / 5

= $21

Value of inventory if turnover ratio is 5 is $21 million.

if invesntory turnover = 7

Value of inventory = $105 / 7

= $15

Value of inventory if turnover ratio is 7 is $15 million.

Cash freed up = $21 million - $15 million

= $6 million.

Total cash freed up because of increase in inventory turnover ratio is $6 million.,