Drugs.

On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receive $1,000 in checks that take three days to clear. What is the clinic’s average net float?

16.2

Drugs ‘R Us operates a mail order pharmaceuticsl business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment, from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of 10 local sepository banks and a concerntration bank in San Francisco would cost $6,500 per month. Under thsi system, customers checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm could earn 10 percent on marketable securities and that there are 260 working days and hence 260 transfers from each lockbox location per year.

a. What is the total annual cost of operating the lockbox system?

b. What is the dollar benefit of the system to Drugs ‘R Us?

c. Should the firm initiate the lockbox system?

16.4

Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.

a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)

b. What is the amount of costly trade credit?

c. What is the approximate annual cost of the costly trade credit?

d. Should Langley replacer its trade credit with the bank loan? explain your answer.

e. If the bank loan is used, how much of the trade credit should be replaced?

16.5

Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000, and the collections department estimates that 30 percent of the cusdtomers pay on the the tenth day and take discounts, 40 percent pay on the thirtieth day and the remaining 30 percent pay on average 40 days after the purchase. (Assume 360 days per year.)

a. What is the firm’s average collection period?

b. What is the firm’s current receivables balance?

c. What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the 30th day?

d. Suppose that the firm’s cost of carrying receivables was 8 percent annually. How much would the toughened credit policy save the firm in annual receivable carrying expense? (Assume that entire amount of receivables had to be financed.)

17.1

a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio?

Use cash to pay off current liabilities.

Collect some of he current accounts receivable.

Use cash to pay off some long term debt.

Purchase additional inventory on credit (i.e., accounts payable).

Sell some of the existing inventory at cost.

b. Assume that the company has a current ratio of 1.2. Now which of the above actions would improve this ratio?

17.4

Consider the following financial statements for BestCare, HMO, a not for profit managed care plan:

BestCare HMO statement of operation and Change in Net Assest Year Ended June 30, 2011 (in tthousands)

Revenue

Premiums earned —$26,682

Co-Insurance——1,689

Interest and other income—-242

Total revenue——–$28,613

Expenses:

Salaries and benefits—-$15,154

Medical supplies and drugs—7,507

Insurance—–3,963

Provision for bad debts—-19

Depreciation—–367

Interest—–385

Total expenses—-$27,395

Net income——$1,218

Net assets, beginning of yr —$900

Net assets, end of yr—-$2,118

BestCare HMO

Balance Sheet

June 30, 2011 (in thousands)

Assets

Cash and cash equivalents $2,737

Net premiums receivable —821

Supplies—-387

Total current assets —-$3.945

Net property and equiment —$5,924

Total assets——-$9,869

Liabilities and Net Assets

Accounts payable-medical services $2,145

Accrued expenses –929

Notes payable—141

Current portion of long term debt–241

Total current liabilities—$3,456

Long term debt—$4,295

Total liabilities—-$7,751

Net assets (equity) $2,118

Total liabilities and net assets $9,869

a. Perform a Du Pont analysis on Best Care. Assume that the industry average ratios are as follows:

Total margin —3.8%

Total asset turnover—2.1

Equity multipier–3.2

Return on equity (ROE) 25.5%

b. Calculate and interpret the following ratios for BestCare: Industry Average

Return on assets (ROA) –8.0%

Current ratio—1.3

Days cash on hand –41 days

Average collection period—7days

Debt ratio—-69%

Debt to equity ratio–2.2

Times interest earned (TIE) ratio —2.8

Fixed asset turnover ratio—5.2

17.5

Consider the following financial statements

Drugs