A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by $300,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad debt losses on the additional $120,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the policy decision made. The profit margin will be 20% of sales and no other expenses will increase. Assume an opportunity cost of 20% Make no policy change. Change to only Policy A. Change to Policy B (means also taking Policy A first). All policies lead to the same total firm profit, thus all policies are equal.

A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by $300,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad debt losses on the additional $120,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the policy decision made. The profit margin will be 20% of sales and no other expenses will increase. Assume an opportunity cost of 20% Make no policy change. Change to only Policy A. Change to Policy B (means also taking Policy A first). All policies lead to the same total firm profit, thus all policies are equal.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 14P

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Kelly expects its sales to be $20 million this year under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 65 days; and the bad debt loss percentage is 4%. Also, Kelly’s cost of capital is 14%, and its variable costs total 62% of sales. Since Kelly wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. It is predicted that sales would increase by $600,000, and that 55 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 2 percent. (Hint, use incremental approach table) What would be the incremental bad debt losses if the change were made? What would be the incremental cost of carrying receivables if the change were made? What are the incremental pre-tax profits from this proposal?
Kelly expects its sales to be $20 million this year under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 65 days; and the bad debt loss percentage is 4%. Also, Kelly’s cost of capital is 14%, and its variable costs total 62% of sales. Since Kelly wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. It is predicted that sales would increase by $600,000, and that 55 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 2 percent. (Hint, use incremental approach table) What are the incremental pre-tax profits from this proposal?
A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales would be 5% less if the proposed new credit policy were implemented. The firm’s short-term interest cost is 10%. Projected sales for the coming year are P100 million. Assume a 360-day year, the increase (decrease) on A/R of this proposed change in credit policy is A. P0 B. (P5,000,000) C. (P6,666,6667) D. (P13,000,000)
The Blue Company has under study a new credit policy that they believe will increase annual sales from P11 million to P14 million. However, the new plan is also expected to increase bad debt losses from P800,000 to P1.2 million each year. The average collection period on collectible sales is now averaging 90 days. This ratio will increase to 120 days for both old and new slaes if the new credit policy is adopted. The increase in sales is expected to increase the company's investment in inventory by P20,000. Assuming a pre-tax reuired rate of return of 25% and a variable cost-to-sales ration of 60%, should the Blue Company adopt the new credit policy? Assume a 360-day year.
Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm’s equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.) Calculate the additional profit contribution from sales that the firm will realize if it makes the proposed change. What marginal investment in accounts receivable will result? Calculate the cost of the marginal investment in accounts receivable. Should the firm implement the proposed change? What other information would be helpful in your analysis?
14. A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales would be 5% less if the proposed new credit policy were implemented. The firm's short-term interest cost is 10%. Projected sales for the coming year are P100 million. Assume a 360-day year, the increase (decrease) on A/R of this proposed change in credit policy is A. PO B. (P5,000,000) c. (P6,666,6667) D. (P13,000,000)
BRLM Company is planning to relax its credit standards to boost sales. As a result, sales are expected to increase 16 percent from 3,000 units per year to 3,480 units per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1.5 percent level. The price per unit is P4,250, the variable cost per unit is P3,060. The firm’s required return on investment is 20 percent.What is the cost of marginal bad debts under the proposed plan? Group of answer choices P168,300 P19,445 P38,838 P258,923 What is the net result of implementing the proposed plan? Group of answer choices –P312,474 +P168,274 +P319,260 –P168,274
Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000 and variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit sales of $710,000. However, bad debts are expected to increase from 1% to 2% of sales. The required rate of return on equal-risk investments is 16.5%. (Note: Assume a 365-day year.) 1) Calculate the additional profit contribution from sales if the proposal is implemented. 2) Calculate the cost of the marginal bad debts. 3) Should the proposal be implemented? Explain.
Zed’s Textiles currently has Credit Sales of $360 million per year and an Average Collection Period of 60 days. Assume that the price of Zed’s products is $60 per unit and that the Variable Costs are $55 per unit. The firm is considering accounts receivable changes that will result in a 20% increase in sales and a 20% increase in the Average Collection Period. No change in Bad Debts is expected. The firm’s equal-risk Opportunity Cost on its investment in Accounts Receivable is 14%. (Note: Use a 365-day year) A. Calculate the Additional Profit Contribution from sales that the firm will realize if it makes the proposed change. (Format: 1,111,111) B. What Marginal Investment in Accounts Receivable will result? (Format: 1,111,111) C. Calculate the Cost of the Marginal Investment in Accounts Receivable. (Format: 1,111,111)
Farmers World, a firm specializing in fertilizers, is evaluating a proposal to relax the credit standards to increase sales. The implemen- tation of this plan is expected to increase sales by 10% from 15,500 to 17,050 units in the following year. The average collection period will increase from 30 to 45 days, and bad debts are expected to increase from 2% to 5% of sales. The selling price per bag is $15, and the variable cost per bag is $12. The required rate of return on equal-risk investments is 22%. Should the proposed plan be implemented? Explain the financial impact. (Note: Assume a 365-day year.) Exercises January February March Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. Month Month Amount April May June Exercises Amount $2,000,000 2,000,000 2,000,000 4,000,000 6,000,000 9,000,000 July August September October November December $12,000,000 14,000,000 9,000,000 5,000,000 4,000,000 3,000,000 16 a. Divide the firm's…
Blossom Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $40. Expected sales will increase by 1,000 units per year. The original sales are 11.000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $2.000 per year. The firm will finance the additional investment in receivables by using a line of credit, which charges 5-percent interest. The firm's tax rate is 20 percent. Calculate the NPV. (Assume Blossom benefits from the credit policy change indefinitely.) (Round answer to 2 decimal places, e.g. 15.75. Enter negative amounts using either a negative sign preceding the number eg.-45 or parentheses eg.(45)) NPV $ 513836 Should the firm begin extending credit under the terms described? Yes
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 12,000 to 13,200 units during the coming year; the average collection period is expected to increase from 50 to 70 days; and bad debts are expected to increase from 1% to 2.5% of sales. The sale price per unit is $41, and the variable cost per unit is $29. The firm's required return on equal-risk investments is 9%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.) The additional profit contrbution from an increase in sales is $ ? (round to the nearest dollar) The cost from the increased marginal investment in A/R is $ ? (round to the nearest dollar)