To answer this question, we calculate the net operating income before tax generated by each of the four plans. We will calculate the cost of capital to carry the accounts receivable and inventory first. To calculate the cost of capital for each of the four proposed plans, we will multiply the average accounts receivable by 80% (the variable cost of the sales that the company has invested and needs to finance), add the average inventory to it, and multiply the total by the cost of capital to calculate the interest expense that will be required to carry the costs in the average accounts receivable and average inventory for one year. Plan A: (($1,500 × .8) + $2,000) × .10 = $320 Plan B: (($2,000 × .8) + $2,300) × .10 = $390 Plan C: (($3,500 × .8) + $2,500) × .10 = $530 Plan D: (($5,000 × .8) + $2,500) × .10 = $650 Net income calculations: Plan A: ($12,000 × .20) ? $100 ? $100 ? $320 + 0 = $1,880 net operating income before tax. Plan B: ($13,000 × .20) ? $125 ? $125 ? $390 + 0 = $1,960 net operating income before tax. Plan C: ($14,000 × .20) minus; $300 ? $250 ? $530 + 0 = $1,720 net operating income before tax. Plan D: ($14,000 × .20) ? $400 ? $350 ? $650 + $500 = $1,900 net operating income before tax. The plan that will generate the highest net operating income before tax is Plan B.
This is not the optimal policy for Harson, because it does not result in the highest net operating income before taxes.
This is not the optimal policy for Harson, because it does not result in the highest net operating income before taxes.
This is not the optimal policy for Harson, because it does not result in the highest net operating income before taxes.
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If the direct cost of products is 80% of sales and the cost of short-term funds is 10%, what is the optimal policy for Harson?