Freedom Oil Company is a fuel oil distributor in New England. Freedom purchases fuel oil from large wholesalers and distributes the oil to its customers, primarily in single-family houses, within 20 miles of its home offices. The company owns a number of medium-sized delivery trucks and four storage tanks. The tanks, when full, represent about 4 months worth of normal winter deliveries.

Freedom makes deliveries year-round, since many customers heat their water with oil. Most of Freedoms business, however, occurs between late September and early May, when fuel oil is used for heating homes.

Freedoms customers are normally billed at the end of each month for deliveries made during that month; payment is due 15 days after the invoice date. Freedom pays its wholesalers about 30 days after receipt of fuel oil deliveries to Freedoms storage tanks. The company uses 2 storage tanks for its own purposes and stores oil for other companies in the other 2 tanks.

Freedom has had a long relationship with its lending institution. Normally, the company borrows in August and September, just before the winter season; the loan balance increases during the winter, usually until February, depending on how cold the winter is. The company generally pays back the loans by the end of April.

a/ Because of rising residential fuel oil prices and competition from other oil dealers as well as the local gas company, Freedom decides to offer a level payment plan: customers pay 12 equal monthly installments based on past usage rather than pay for the amount of oil actually delivered each month. Payments on the new level payment plan will begin in May. Will this new program increase or decrease the cash flow timing differences in Freedoms asset conversion cycle? Why?

b/ Would you expect this level payment plan to affect the companys need to borrow and the timing of its borrowing needs? How?

c/ John Lodge, owner and manager of Freedom, has developed a keen sense for oil prices and New England winters. This year he projected that the coming winter might be a little colder than usual. Concerned about the availability of fuel oil during the coldest months, he decided to increase his inventory of oil to 4 tanks, rather than the normal two. In June he began buying oil discreetly so that, by September, he would have 4 full tanks. What effect will Lodges decision have on the companys cash flow timing differences? Explain.

d/ What effect will Lodges decision have on the pattern of the companys borrowing from the bank? Explain.