David has a company decorating houses for the holidays. He has secured a $25,000 line of credit from his bank. For which purpose is David more likely to use this credit line?
Question 19 options:
a warehouse to store decorations until they are sold
labor to install the decorations in November
a truck with a ladder to put up lights
a full-time, year-round office person to answer phones and take orders
David is more likely to use the credit line for labor to install the decorations in November.
To determine which purpose David is more likely to use the credit line for, let's analyze each option:
a) Warehouse storage for decorations: David might need a warehouse to store decorations until they are sold. However, this is not a recurring expense and can typically be managed within the existing cash flow of the company. Using a credit line for this purpose may not be necessary.
b) Labor to install decorations in November: Given that holiday decorations need to be installed and set up during November, it is possible that David may use the credit line to cover the labor costs associated with hiring workers temporarily for this specific period.
c) Truck with a ladder for putting up lights: David may choose to use a credit line to purchase or lease a truck with a ladder for installing lights on houses. This could be viewed as a capital expense that requires upfront funds but could potentially generate revenue throughout the holiday season.
d) Full-time, year-round office person: Hiring a full-time, year-round office person to answer phones and take orders could be considered an operational expense. It is less likely that David would use the credit line for this purpose, as it would have an ongoing financial commitment that may be better managed through regular cash flow.
Based on the analysis, the labor costs for installing decorations in November (option b) or purchasing/leasing a truck with a ladder for installing lights (option c) are more likely to be funds that David would use his credit line for. The choice between the two would depend on David's specific business needs and plans.
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