Problem 1

Mountain Health System, Inc. is a well-known and reputable supplier of integrated heart monitoring devices. The firm is currently debating whether to expand its sales overseas. While the firm expects an extra $3 million in sales if it enters foreign markets, it also knows that 15% of its sales will ultimately be uncollectible. In addition, selling costs will be 3% on all new sales and the firm's production costs are 80% of sales. Mountain Health Systems tax rate is 30%. (PLEASE SHOW YOUR WORK).

a) Calculate Mountain Health Systems additional net income from the new sales.

b) If the average investment in accounts receivable is $750,000 and management requires that any new project earn a minimum of 10% return on investment. Should the firm enter the foreign markets?

Problem 2

Novelty Medical Pacemakers, Inc. is experiencing some inventory control problems. The manager, Wanda Mollick, currently orders 10,000 units four times each year to handle annual demand of 40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. Mollick maintains a safety stock of 200 units. (PLEASE SHOW YOU WORK).

a) What is Novelty Medical Pacemakers' current total annual inventory cost?

b) Calculate the economic ordering quantity (EOQ).

c) What is average inventory under EOQ if Ms. Mollick maintains a safety stock of 200 units?

d) Calculate total annual inventory cost under EOQ. How does this compare to her current inventory costs?

Problem 3

The Medical Corporation of America has developed a new type of body temperature thermometer. The company expects to increase its sales by 25% over the past year due to this new development. Last year's sales were $150,000 at a selling price of $100 per unit. A safety stock of 35 units has eliminated stockouts. The manager would like to cut costs as much as possible and decided to implement the EOQ inventory management system in order to minimize the total costs of inventory. The cost of warehouse space is $2.5 per unit. Inventory handling expense is $1.50 per unit, and inventory insurance premium is $1.00 per unit. Ordering cost is $100 per order. (PLEASE SHOW YOUR WORK).

a) What is the economic order quantity?

b) What is the amount of average inventory?

c) How many orders will be made per year?

d) What is the total cost of this inventory decision?