Jones Wholesale, Inc. is a medical equipment dealer selling to doctors, hospitals, and other medical providers. The company has historically been profitable, but is presently having cash flow problems. The firm is evaluating the sales forecast for the upcoming year for one of Jones products, mobile ultrasound imaging units. Jones forecasts 27,000 units will be sold in the upcoming year (evenly distributed across the year).

INVENTORY PURCHASES AND ACCOUNTS PAYABLE

Jonessupplier for this product recently introduced an aggressive quantity discount program. If Jones agrees to order 1,000machines at a time, the price will drop by 1% from the regular price of $26,800/unit. Jones presently orders 500 units at a time, or 54 times a year (27,000/500). They estimate that ordering costs are $615/order and holding costs are $350/unit based on average inventory.

The supplier offers 45 day credit terms.While not new, the supplier will begin enforcing the 22% fee for late payors. Presently, even though the terms are net 45, JonesDPO averages 85 days. If Jones does not select the quantity discount program,it will continue to be offered net 45 terms. However, it will now be assessed the late fee.

CREDIT TERMS AND ACCOUNTS RECEIVABLE

Jonessells the machines to its customers for $37,200. Jones sells to customers on 30 day terms. DSO generally runs 48 days. Jones does not aggressively manage collections, fearful that it will lose customers. A major competitor recently introduced 2/10, net 50 terms. If Jones matches the competition, it estimates that 40% of its customers would take advantage of the discount. Those not taking the discount will likely slow to 58 days. Jones would offer the discount to protect existing sales, and does not expect sales growth from the new credit policy. It believes if it doesnt offer the discount that sales will decrease by 3%.

ANALYSIS

To calculate value, Jones uses a required rate of return of 18%. Management wants to evaluate four combinations of inventory order quantity, A/P terms, and A/R terms that impact cash flows and the timing of cash flows.To determine the optimal combination, the highest NPV over the upcoming 360-day yearwill be selected. NPV is calculated by (1) calculating the PV of the cash inflows from sales (A/R), (2) subtracting the PV of the outflows related to the inventory (holding and ordering costs), and (3) subtracting the PV of the outflows related to purchasing decisions (A/P).

The NPV from the present structure (modified for the late fee and expected loss in sales) will be compared to the four options below:

• Case 1

New A/R terms

Old A/P terms (paying in 85 days with late fee)

Current inventory quantity

• Case 2

New A/R terms

Old A/Pterms(paying on time in 45 days)

Current inventory quantity

• Case 3

New A/R terms

New A/P terms (paying on time in 45 days)

Higher inventory quantity with quantity discount

• Case 4

New A/R terms

New A/P terms (paying in 85 days with late fee)

Higher inventory quantity with quantity discount

To determine the outcome for the various options, use Excel to perform the calculations. (I have done this already, please see excel image. Just need recommendation questions answered below.)

Evaluate the details of each case outcome including rejected options.

Which option should Jones choose? Why?

After adding JIT what is your recommendation? Why?

JONES CASE SUMMARY MAKE ALL INPUTS ON THIS SHEET - OTHER SHEETS ARE TIED TO THIS SHEET - DO NOT MAKE CHANGES TO OTHER SHEETS Present Case 1 Case 2 Case 3 Case 4 JIT Case X INVENTORY Order Costs (per order) (OC) Holding Costs (per unit) (HC) Unit Cost (C) Inventory Order Quantity (0) 615 $ 350 $ 26,800 $ 500 615 350 26,800 500 $ $ $ 615 $ 350 $ 26,800 $ 500 615 $ 350 $ 26,800 $ 1,000 615 $ 350 $ 26,800 $ 1,000 105 - 26,800 75 $ S $ 615 350 26,800 750! 45 45 PAYABLES Credit Period (Terms) Payment Period (CP) Quantity Discount Daily Late Fee (22%/year) 85 45 0% 1% 1% 0% 0.0610% 0% 0.0610% 1% 0.0610% 0% 0.0610% 0.0610% 0.0610% 0.0610% 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 $ $ $ $ $ $ SALES / RECEIVABLES Base Sales (# units sold) Selling Price (per unit) Sales Growth Rate (g) Credit Period (Terms) DSO (non-discount customers) Discount Period (DP) Discount (d) Percent Taking Discount (p) 10 2% 40% 40% 40% 40% GENERAL Opportunity Cost (i) Base Period (days) 18% 360 18% 360 18% 360 18% 360 18% 360 25% 360 18% 360 NPV ANALYSIS + PV Cash Flow From A/R - PV Cash Flow Inventory Cost - PV Cash Flow From A/P = NPV $ $ $ $ 903,381,501 $ 102,297 $ 656,884,019 $ 246,395,185 $ 899,893,355 $ 102,297 $ 656,884,019 $ 242,907,040 $ 899,893,355 $ 102,297 $ 652,833,326 $ 246,957,732 $ 899,893,355 $ 162,377 $ 647,278,955 $ 252,452,023 $ 899,893,355 $ 162,377 $ 651,277,703 $ 248,453,275 $ 868,152,688 $ 30,240 $ 645,665,737 $ 222,456,711 $ 899,893,355 129,992 646,791,730 252,971,634 JONES CASE SUMMARY MAKE ALL INPUTS ON THIS SHEET - OTHER SHEETS ARE TIED TO THIS SHEET - DO NOT MAKE CHANGES TO OTHER SHEETS Present Case 1 Case 2 Case 3 Case 4 JIT Case X INVENTORY Order Costs (per order) (OC) Holding Costs (per unit) (HC) Unit Cost (C) Inventory Order Quantity (0) 615 $ 350 $ 26,800 $ 500 615 350 26,800 500 $ $ $ 615 $ 350 $ 26,800 $ 500 615 $ 350 $ 26,800 $ 1,000 615 $ 350 $ 26,800 $ 1,000 105 - 26,800 75 $ S $ 615 350 26,800 750! 45 45 PAYABLES Credit Period (Terms) Payment Period (CP) Quantity Discount Daily Late Fee (22%/year) 85 45 0% 1% 1% 0% 0.0610% 0% 0.0610% 1% 0.0610% 0% 0.0610% 0.0610% 0.0610% 0.0610% 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 27,000 37,200 $ $ $ $ $ $ SALES / RECEIVABLES Base Sales (# units sold) Selling Price (per unit) Sales Growth Rate (g) Credit Period (Terms) DSO (non-discount customers) Discount Period (DP) Discount (d) Percent Taking Discount (p) 10 2% 40% 40% 40% 40% GENERAL Opportunity Cost (i) Base Period (days) 18% 360 18% 360 18% 360 18% 360 18% 360 25% 360 18% 360 NPV ANALYSIS + PV Cash Flow From A/R - PV Cash Flow Inventory Cost - PV Cash Flow From A/P = NPV $ $ $ $ 903,381,501 $ 102,297 $ 656,884,019 $ 246,395,185 $ 899,893,355 $ 102,297 $ 656,884,019 $ 242,907,040 $ 899,893,355 $ 102,297 $ 652,833,326 $ 246,957,732 $ 899,893,355 $ 162,377 $ 647,278,955 $ 252,452,023 $ 899,893,355 $ 162,377 $ 651,277,703 $ 248,453,275 $ 868,152,688 $ 30,240 $ 645,665,737 $ 222,456,711 $ 899,893,355 129,992 646,791,730 252,971,634