Reann Baird owns a small retail shop. Historically, her annual sales have been about $250,000, with 60%
Question:
Reann Baird owns a small retail shop. Historically, her annual sales have been about $250,000, with 60% of that coming in the November and December holiday season. This year, on a buying trip to southern China, Reann discovered an item that she is certain will be in huge demand. It’s a mechanical cricket powered by a photovoltaic cell—the cricket automatically silences at night when it gets dark and then starts chirping in the morning when the sun’s rays hit it. Reann can buy the crickets from her Guangdong supplier for $1.00 each; she plans to sell them for $9.95 each. Reann is trying to decide how many of the crickets she should order. If she orders 30,000 or more, she can get a volume discount and pay just $0.80 each. However, she does not have room to store that many crickets, and she will have to rent storage space for $3,000 per month (three-month minimum). Also, the Guangdong supplier will only accept cash, and because Reann does not have very good credit, she will have to pay 17% annual interest on any money she borrows. She expects any loan to be outstanding for about two months. Reann has come to you for advice about whether she should buy a large quantity of crickets or play it safe and order just 10,000. What advice would you give her?
Step by Step Answer:
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain