Callison Airlines Is Deciding Whether to Pursue a Restricted or Relaxed

question 95

Multiple Choice

Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison's annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent. If the company follows a restricted policy, its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.
-If the firm adopts a restricted policy, how much will it save in interest expense (relative to what it would be if Callison were to adopt a relaxed policy) ?

• A) $ 3,233
• B) $ 6,175
• C) $ 9,818
• D) $ 7,200
• E) $10,136

---

Definitions:

Economic Production Quantity

A model that determines the optimal quantity of a product to produce, minimizing total holding and setup costs.

Setup Time

The time required to prepare a machine or process for production.

Lot Size

It denotes the quantity of units produced or ordered in a single batch, influenced by considerations like cost and demand.

JIT Policies

Just-In-Time Policies; strategies aimed at minimizing inventory and reducing waste by receiving goods only as they are needed in the production process.