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    Implicit Interest Rate and Accounts Receivable Aging

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    Please help with the following problems: page 251
    7-29. Millbridge Hospital buys its supplies in bulk and has recently switched vendors. The first purchase Millbridge made was for 500 boxes of gauze at $3.46 a box. The purchase had payment terms of 2/15 N/30. Millbridge earns four percent on its idle cash. Should it take the discount or not? Justify your answer by showing calculations. (Refer to Appendix 7-B to solve this problem.)

    7-30. Meals for the Homeless usually experiences seasonality in its cash balances. In December, contributions from donors increase its cash balances, and then these balances are used throughout the following year. By the fall, Meals for the Homeless has a tight cash flow. It has a line of credit with its bank, which allows it to draw up to $500,000 at seven percent interest per year. During 2013, Meals for the Homeless draws down $135,000 on October 1 and repays it at the start of business on January 3, 2014—exactly 94 days later. How much should it pay back on January 3, and how much of that is interest?

    7-31. Meals for the Homeless has many sources of income, but they pay Meals very differently. Specifically, Meals has contracts with the city, county, and state to provide food services. In addition, Meals has contracted with a private foundation to augment its foods with more healthful options. The city owes Meals $400,000, half of which is current, onequarter is more than 30 days but less than 61 days old, 15% is between 61 and 90 days old, and the remainder is more than 91 days old. The county owes Meals $900,000, only one-third of which is current, another one-third is more than 30 days but less than 61 days old, and the remainder is more than 90 days old. The state owes Meals $1.5 million, 40% is current, 30% is between 30 and 60 days old, 20% is between 61 and 90 days old, and the remainder is more than 91 days old. The foundation owes Meals $150, 000, of which half is current and the other half is more than 30 days but less than 61 days old. Prepare an accounts-receivable aging schedule for Meals by total dollars and percent.

    7-32. Millbridge Hospital receives earned income from several sources: Medicare, Medicaid, private insurance, and selfpay customers. The federal government owes the hospital $7 million, 60% is current, 30% is between 31 and 61 days old, and the remaining 10% is between 61 and 90 days old. The state owes the hospital $5 million for Medicaid, 40% of which is current, 30% is between 31 and 60 days old, 20% is between 61 and 90 days old, and the remainder is more than 91 days old. Private insurance owes the hospital $4 million, half of which is current, 25% is between 31 and 60 days old, and the remaining percent is more than 91 days old. Self-pay customers owe $1 million, 30% is current, 40% is 31 to 60 days old, 10% is 61 to 90 days old, and the remainder is more than 91 days old. Prepare an accounts-receivable aging schedule by total dollars and by percent.

    7-33. Millbridge Hospital buys 10,000 boxes of latex gloves every year. Each box costs the hospital $7 dollars. The cost to place an order for the gloves—which covers the employee staff time, shipping costs, the hospital's receiving center for inventorying, for example—is estimated at $50 dollars per order. Carrying costs (for storing the boxes, verifying the inventory periodically, etc.) are estimated at 50 cents per box per year. Millbridge uses a six percent interest-cost assumption in its calculations. How many boxes should be ordered at a time? How many orders per year should there be? What are the total ordering and carrying costs at the EOQ (economic order quantity)? Contrast these costs at the EOQ to the total cost if all boxes were simply ordered at the start of the year.

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    Solution Summary

    This solution first illustrates how to compute the implicit interest rate on a discount and to compare it to the interest earned on idle cash. It then illustrates how to prepare an accounts receivable aging schedule by dollars and percent. It concludes by illustrating how to compute the economic order quantity, the total ordering and carrying costs at the EOQ, and the total ordering and carrying costs by ordering goods all at once.

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