+598 The item in question at a unit selling price of $100.
Red River’s forecast volume of sales for the first year is 8000 units. The annual fixed cost for adding this product to the inventory is estimated to be $200,000.
The net price, after the standard supplier discount of 25%, plus an additional 10% for early order placement, is $60 per unit, delivered. Since the product is market–ready, this is also the unit variable cost. The supplier guarantees the products will be available for sale in store 60 days from date of order.
Mr. Lee is evaluating this option. He had decided to finance the purchase of this new inventory using a personal asset valued at $600,000 USD. The plan is to make a loan to his business. He prefers this alternative to bank financing and he is certain the product will generate a profit for his investment. His intention is to convert the asset to Canadian funds and invest it in two, successive 30-day GIC’s in order to accrue interest on this sum while waiting for the goods to arrive. The bank is offering a rate of 3.25% pa and the current exchange rate is 1CAD=0.900USD.
Will Mr. Lee have enough capital to cover the total cost of goods after he converts his USD funds to CAD? Show your calculation.
