10th Edition

ISBN: 9780135160473

Author: KEOWN

Publisher: PEARSON CO

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Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost st…

Marginal Costing

Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs r…

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Textbook Question

Chapter 15, Problem 13SP

(Cost of accounts receivable) The Michelin Warehousing and Transportation Company (WTC) needs $300,000 to finance an anticipated expansion in receivables due to increased sales. WTC’s credit terms are net 60, and its average monthly credit sales are $200,000. In general, the firm’s customers pay within the credit period; thus, the firm’s average accounts-receivable balance is $400,000. Chuck Idol, WTC’s comptroller, approached the firm’s bank with a request for a loan for the $300,000 using the firm’s accounts receivable as collateral. The bank offered to make a loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged ($200,000 per month). Furthermore, the bank agreed to lend up to 75 percent of the face value of the receivables pledged.

a. Estimate the cost of the receivables loan to WTC when the firm borrows the $300,000. The prime rate is currently 5 percent.
b. Idol also requested a line of credit for $300,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 3 percent over prime and required a 15 percent compensating balance. WTC currently maintains an average demand deposit of $20,000. Estimate the cost of the line of credit to WTC.
c. Which source of credit should the firm select? Why?

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Chapter 15, Problem 12SP

Chapter 15, Problem 14SP

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Chapter 15 Solutions

EBK FOUNDATIONS OF FINANCE

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Solution Summary: The author calculates the effective rate of interest on the loan on pledged accounts receivables and the cost of the line of credit to Company W.

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