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In the early 1990s, Cranston Dispensers, Inc. was quick to realize that concern for the
environment would cause many consumer product manufacturers to move away from aerosol
dispensers to mechanical alternatives that pose no threat to the ozone layer. In the following
decades, most countries banned the most popular aerosol propellants, first chlorofluorocarbons
and then hydrocholrofluorocarbons. As the leading manufacturer of specialized pump and spray
containers for a variety of products in cosmetics, household cleaning supplies, and
pharmaceutical industries, Cranston experienced a rapid increase in sales and profitability after it
made this strategic move. At that time, the firm focused much of its attention on capturing
market share and keeping up with demand.
For most of 20x4 and 20x5, however, Cranston’s share price was falling while shares of other
companies in the industry were rising. At the end of fiscal 20x5, the company hired Susan
McNulty as the new treasurer, with the expectation that she would diagnose Cranston’s problems
and improve the company’s financial performance relative to that of its competitors. She decided
to begin the task with a thorough review of the company’s working capital management
practices.
While examining the company’s financial statements, she noted that Cranston had a higher
percentage of current assets on its balance sheet than other companies in the packaging industry.
The high level of current assets caused the company to carry more short-term debt and to have
higher interest expense than its competitors. It was also causing the company to lag behind its
competitors on some key financial measures, such as return on assets and return on equity.
In an effort to improve Cranston’s overall performance, Susan has decided to conduct a
comprehensive review of working capital management policies, including those related to the
cash conversion cycle, credit policy, and inventory management. Cranston’s financial statements
for the three most recent years follow.
Cranston Dispensers
Income Statement
($ in thousands)
Account
20x5
20x4
20x3
Sales
3,784
3,202
2,760
Cost of Goods Sold
2,568
2,172
1,856
Gross Profit
1,216
1,030
904
Selling & Administrative
550
478
406
Depreciation
247
230
200
Earnings Before Interest and Taxes
419
322
298
Interest Expense
20
25
14
Taxable Income
399
297
284
Taxes
120
89
85
Net Income
279
208
199
Cranston Dispensers
Balance Sheet
($ in thousands)
Account
20x5
20x4
20x3
Current Assets
Cash
341
276
236
Accounts Receivable
722
642
320
Inventory
595
512
388
Total Current Assets
1,658
1,430
944
Net Fixed Assets
1,822
1,691
1,572
Total Assets
3,480
3,121
2,516
Current Liabilities
Accounts Payable
332
288
204
Accrued Expenses
343
335
192
Short-term Notes
503
491
243
Total Current Liabilities
1,178
1,114
639
Long-term Debt
398
324
289
Other Long-term Liabilities
239
154
147
Total Liabilities
1,815
1,592
1,075
Owners’ Equity
Common Equity
1,665
1,529
1,441
Total Liabilities & Equity
3,480
3,121
2,516
Question:
One of Cranston’s principal raw materials is plastic pellets, which it purchases in lots of 100
pounds at $0.35 per pound. Annual consumption is 8,000,000 pounds. Within a broad range of
order sizes, ordering and shipping costs are $120 per order. Carrying costs are $1.50 per year per
100 pounds. Compute the EOQ for plastic pellets. If Cranston used the EOQ model, how often
would it order pellets?
Account
20x5
20x4
20x3
Sales
3,784
3,202
2,760
Cost of Goods Sold
2,568
2,172
1,856
Gross Profit
1,216
1,030
904
Selling & Administrative
550
478
406
Depreciation
247
230
200
Earnings Before Interest and Taxes
419
322
298
Interest Expense
20
25
14
Taxable Income
399
297
284
Taxes
120
89
85
Net Income
279
208
199
Solution
Answer:
EOQ=(2*800000*120/1.50)1/2
=11314 lots per order
Order Pellets=800000/11314
=71
=365 days/71=5.14 days
So, Cranston should be placing order every five days.

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In the early 1990s, Cranston Dispensers, Inc. was quick to realize t.pdf

  • 1. In the early 1990s, Cranston Dispensers, Inc. was quick to realize that concern for the environment would cause many consumer product manufacturers to move away from aerosol dispensers to mechanical alternatives that pose no threat to the ozone layer. In the following decades, most countries banned the most popular aerosol propellants, first chlorofluorocarbons and then hydrocholrofluorocarbons. As the leading manufacturer of specialized pump and spray containers for a variety of products in cosmetics, household cleaning supplies, and pharmaceutical industries, Cranston experienced a rapid increase in sales and profitability after it made this strategic move. At that time, the firm focused much of its attention on capturing market share and keeping up with demand. For most of 20x4 and 20x5, however, Cranston’s share price was falling while shares of other companies in the industry were rising. At the end of fiscal 20x5, the company hired Susan McNulty as the new treasurer, with the expectation that she would diagnose Cranston’s problems and improve the company’s financial performance relative to that of its competitors. She decided to begin the task with a thorough review of the company’s working capital management practices. While examining the company’s financial statements, she noted that Cranston had a higher percentage of current assets on its balance sheet than other companies in the packaging industry. The high level of current assets caused the company to carry more short-term debt and to have higher interest expense than its competitors. It was also causing the company to lag behind its competitors on some key financial measures, such as return on assets and return on equity. In an effort to improve Cranston’s overall performance, Susan has decided to conduct a comprehensive review of working capital management policies, including those related to the cash conversion cycle, credit policy, and inventory management. Cranston’s financial statements for the three most recent years follow. Cranston Dispensers Income Statement ($ in thousands) Account 20x5 20x4 20x3 Sales 3,784 3,202 2,760
  • 2. Cost of Goods Sold 2,568 2,172 1,856 Gross Profit 1,216 1,030 904 Selling & Administrative 550 478 406 Depreciation 247 230 200 Earnings Before Interest and Taxes 419 322 298 Interest Expense 20 25 14 Taxable Income 399 297 284 Taxes 120 89 85 Net Income 279 208 199
  • 3. Cranston Dispensers Balance Sheet ($ in thousands) Account 20x5 20x4 20x3 Current Assets Cash 341 276 236 Accounts Receivable 722 642 320 Inventory 595 512 388 Total Current Assets 1,658 1,430 944 Net Fixed Assets 1,822 1,691 1,572 Total Assets 3,480 3,121 2,516 Current Liabilities Accounts Payable 332 288
  • 4. 204 Accrued Expenses 343 335 192 Short-term Notes 503 491 243 Total Current Liabilities 1,178 1,114 639 Long-term Debt 398 324 289 Other Long-term Liabilities 239 154 147 Total Liabilities 1,815 1,592 1,075 Owners’ Equity Common Equity 1,665 1,529 1,441 Total Liabilities & Equity 3,480 3,121 2,516 Question: One of Cranston’s principal raw materials is plastic pellets, which it purchases in lots of 100
  • 5. pounds at $0.35 per pound. Annual consumption is 8,000,000 pounds. Within a broad range of order sizes, ordering and shipping costs are $120 per order. Carrying costs are $1.50 per year per 100 pounds. Compute the EOQ for plastic pellets. If Cranston used the EOQ model, how often would it order pellets? Account 20x5 20x4 20x3 Sales 3,784 3,202 2,760 Cost of Goods Sold 2,568 2,172 1,856 Gross Profit 1,216 1,030 904 Selling & Administrative 550 478 406 Depreciation 247 230 200 Earnings Before Interest and Taxes 419 322 298 Interest Expense 20 25 14
  • 6. Taxable Income 399 297 284 Taxes 120 89 85 Net Income 279 208 199 Solution Answer: EOQ=(2*800000*120/1.50)1/2 =11314 lots per order Order Pellets=800000/11314 =71 =365 days/71=5.14 days So, Cranston should be placing order every five days.