MBA 655 Quiz 4 Cranston Dispensers, Inc

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MBA 655

Quiz 4

Cranston Dispensers, Inc.

In
the early 1990s, Cranston Dispensers, Inc. was quick to realize that concern
for the environment would cause many consumer product manufacturers to move
away from aerosol dispensers to mechanical alternatives that pose no threat to
the ozone layer. In the following
decades, most countries banned the most popular aerosol propellants, first
chlorofluorocarbons and then hydrocholrofluorocarbons. As the leading
manufacturer of specialized pump and spray containers for a variety of products
in cosmetics, household cleaning supplies, and pharmaceutical industries,
Cranston experienced a rapid increase in sales and profitability after it made
this strategic move. At that time, the
firm focused much of its attention on capturing market share and keeping up
with demand.

For
most of 20×4 and 20×5, however, Cranston’s share price was falling while shares
of other companies in the industry were rising.
At the end of fiscal 20×5, the company hired Susan McNulty as the new
treasurer, with the expectation that she would diagnose Cranston’s problems and
improve the company’s financial performance relative to that of its
competitors. She decided to begin the
task with a thorough review of the company’s working capital management
practices.

While
examining the company’s financial statements, she noted that Cranston had a
higher percentage of current assets on its balance sheet than other companies
in the packaging industry. The high
level of current assets caused the company to carry more short-term debt and to
have higher interest expense than its competitors. It was also causing the company to lag behind
its competitors on some key financial measures, such as return on assets and
return on equity.

In
an effort to improve Cranston’s overall performance, Susan has decided to
conduct a comprehensive review of working capital management policies,
including those related to the cash conversion cycle, credit policy, and
inventory management. Cranston’s
financial statements for the three most recent years follow.

Cranston Dispensers

Income Statement

($ in thousands)

Account

20×5

20×4

20×3

Sales

3,784

3,202

2,760

Cost
of Goods Sold

2,568

2,172

1,856

Gross
Profit

1,216

1,030

904

Selling
& Administrative

550

478

406

Depreciation

247

230

200

Earnings
Before Interest and Taxes

419

322

298

Interest
Expense

20

25

14

Taxable
Income

399

297

284

Taxes

120

89

85

Net
Income

279

208

199

Cranston Dispensers

Balance Sheet

($ in thousands)

Account

20×5

20×4

20×3

Current
Assets

Cash

341

276

236

Accounts Receivable

722

642

320

Inventory

595

512

388

Total
Current Assets

1,658

1,430

944

Net
Fixed Assets

1,822

1,691

1,572

Total
Assets

3,480

3,121

2,516

Current
Liabilities

Accounts Payable

332

288

204

Accrued Expenses

343

335

192

Short-term Notes

503

491

243

Total
Current Liabilities

1,178

1,114

639

Long-term
Debt

398

324

289

Other
Long-term Liabilities

239

154

147

Total
Liabilities

1,815

1,592

1,075

Owners’
Equity

Common
Equity

1,665

1,529

1,441

Total
Liabilities & Equity

3,480

3,121

2,516

Required:

1. Determine
Cranston’s average production cycles for 20×4 and for20x5.

2. Determine
Cranston’s average collection cycles for 20×4 and for 20×5. Assume that all sales are credit sales.

3. Determine
Cranston’s average payment cycles for 20×4 and for 20×5.

4. Using your answers
to questions 1 through 3, determine Cranston’s cash conversion cycles for 20×4
and for 20×5.

5. Cranston now bills
its customers with terms of net 45.
Although most customers pay on time, some routinely stretch the payment
period to sixty or even ninety days.
What steps can Cranston take to encourage clients to pay on time? What is the potential risk of implementing
penalties for late payment?

6. Suppose Cranston
institutes a policy of granting a 1% discount for payment within fifteen days
with the full amount due in 45 days.
Half the customers take the discount, the other half take an average of
sixty days to pay.

a.
What
is the length of Cranston’s collection cycle under this new policy?

b.
In
dollars, how much would the policy have cost Cranston in 20×5?

c.
If
this policy had been in effect during 20×5, by how many days would Cranston
have shortened the cash conversion cycle?

7. An image-based
lockbox system could accelerate Cranston’s cash collections by three days. Cranston can earn an annual rate of 6% on the
cash freed by accelerated collections. Using
sales for 20×5, determine the most that Cranston should pay per year for the
lockbox system.

8. One of Cranston’s
principal raw materials is plastic pellets, which it purchases in lots of 100
pounds at $0.35 per pound. Annual
consumption is 8,000,000 pounds. Within
a broad range of order sizes, ordering and shipping costs are $120 per order.
Carrying costs are $1.50 per year per 100 pounds. Compute the EOQ for plastic pellets. If Cranston used the EOQ model, how often
would it order pellets?

MBA 655 Quiz 4 Cranston Dispensers, Inc
MBA 655 Quiz 4 Cranston Dispensers, Inc

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…Total xxxxx for xxxx $3,784 Half xxxxxxxxx taking discounts x Sales x xxxxx 1% xxxxxxxx amount = xx 92 Less: xxxxxx on xxx xxx = x 68 Net xxxx to Cranston x 13 xx x If xxxx policy had xxxx in effect xxxxxx 20×5, xx xxx many xxxx would Cranston xxxx shortened the xxxx conversion xxxxxx xxx cash xxxxxxxxxx cycle of xxxx is 66 xxxx as xxxxxxxx xxxxx in xxxxxxxx #2 This xxxxxxxxxx period will xx 37 x xxxx Hence xxx decrease in xxxxxxxxxx period will xx 28 x xxxx (66 xxxx – 37 x days) 7 xx image-based xxxxxxx xxxxxx could xxxxxxxxxx Cranston’s cash xxxxxxxxxxx by three xxxx Cranston xxx xxxx an xxxxxx rate of xx on the xxxx freed xx xxxxxxxxxxx collections xxxxx sales for xxxxx determine the xxxx that xxxxxxxx xxxxxx pay xxx year for xxx lockbox system xxx saving xx x days xxxx help Cranston xx get the xxxxx of x xxxx earlier xxx sales can xx computed as xxxxxx Total xxxxx xxx 2005 xxxxxx 3 days xxxxx = $31 xx (3,784 x xxxx x x 6% interest x 1 87 xxxxx Cranston xxxxxx xxx upto xx 87 per xxxx for rhe xxxxxxx system xxx xxxx to xxxxxxxx =…

220011.xlsx (14.96 KB)Preview: thousands)Account20x520x420x3SalesCost xx Goods xxxxxxxxx ProfitSelling & xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Before Interest xxx TaxesInterest xxxxxxxxxxxxxx xxxxxxxxxxxxxx IncomeBalance xxxxxxxxxxxx Assets Cash xxxxxxxx Receivable InventoryTotal xxxxxxx AssetsNet xxxxx xxxxxxxxxxx AssetsCurrent xxxxxxxxxxx Accounts Payable xxxxxxx Expenses Short-term xxxxxxxxxx Current xxxxxxxxxxxxxxxxxxxx xxxxxxxxx Long-term xxxxxxxxxxxxxxxx LiabilitiesOwners’ EquityCommon xxxxxxxxxxx Liabilities & xxxxxxxxxxxxxxxx    xxxxxxxxx xxxxxxxxxxxxxxxxx average xxxxxxxxxx cycles for xxxx and for20x5 x    xxxxxxxxx xxxxxxxxxxxxxxxxx average xxxxxxxxxx cycles for xxxx and for xxxx Assume xxxx xxx sales xxx credit sales x    Determine xxxxxxxxxxxxxxxxx average xxxxxxx xxxxxx for xxxx and for xxxx 4    xxxxx your xxxxxxx xx questions x through 3, xxxxxxxxx Cranston’s cash xxxxxxxxxx cycles xxx xxxx and xxx 20×5 5 xxxxxxxx Cranston now xxxxx its xxxxxxxxx xxxx terms xx net 45 xxxxxxxx most customers xxx on xxxxx xxxx routinely xxxxxxx the payment xxxxxx to sixty xx even xxxxxx xxxx What xxxxx can Cranston xxxx to encourage xxxxxxx to xxx xx time? xxxx is the xxxxxxxxx risk of xxxxxxxxxxxx penalties xxx xxxx payment?6 xxxxxxxx Suppose Cranston xxxxxxxxxx a policy xx granting x