The Smith Corporation Is a Maker of Fine Stereo Components

question 76

Essay

The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000.They need a short-term bank loan of $400,000 for three months.The bank has proposed two different financing arrangements.The first is a floating lien arrangement at a rate of 22 percent.The second proposal is for a terminal warehouse arrangement at 11 percent.Under the latter proposal,Smith will pay $1,000 a month plus round trip shipping expense of $6,000.Which source of credit should be selected by the Smith Corporation? Explain.

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Definitions:

Equivalent Units

A concept used in the cost accounting process that expresses the amount of work in process and finished units as a total of equivalent complete units.

Cost Per Equivalent Unit

A calculation used in process costing that assigns a cost to partially completed units, making them equivalent to fully completed units for inventory valuation.

Finished Goods Inventory

Products that have completed the manufacturing process but have not yet been sold or distributed to customers.

Direct Materials

Raw materials that are directly traceable to the manufacturing of a product and constitute a significant portion of production costs.