Short-term versus longer-term borrowing

Saver Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.

How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year3? What would be the total interest cost compared to the 10 percent, three-year loan?

Economic ordering quantity

Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of $6 per order, and carrying costs of$2.40 per pipe.

1. What is the economic ordering quantity?
2. How many orders will be placed during the year?
3. What will the average inventory be?

Break-even point and degree of leverage

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $80,000,while the variable costs of grapes are $0.10 per pound.

1. What is the break-even point in bags? b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
2. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
3. If Healthy Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20.000 and25,000 bags.
4. What is the degree of combined leverage at both sales levels?