Dome Metals has credit sales of $198,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 4/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 8 percent. The new credit terms will increase sales by 20% because the 4% discount will make the firm's price competitive. a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) Net change in income b. Should the firm offer the discount? No Yes

Dome Metals has credit sales of $198,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 4/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 8 percent. The new credit terms will increase sales by 20% because the 4% discount will make the firm's price competitive. a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) Net change in income b. Should the firm offer the discount? No Yes

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 5P

See similar textbooks

Related questions

Q: The current credit terms of Brendor Manufacturing Ltd are 2/15, net 45 days. The company’s total…

A: In the world of trading goods, suppliers often extend discounts to buyers to motivate them to pay…

Q: Wontaby Ltd. Is extending its credit terms from 30 to 45 days. Sales are expected to increase from…

A: The annual financing cost, also known as the annual cost of financing or annual finance charge, is…

Q: Show me the solution please, thank you! ABC is deciding to give a cash discount of 1% if the…

A: Solution: In the given question benefit of the policy need to be calculated. Analysis of benefits…

Q: Crystals’. currently makes all sales on credit and offers no cash discount. The firm is considering…

Q: A company plans to tighten its credit policy. The new policy will decrease the average number of…

A: Credit Policy is very crucial for company's working cycle. It should be optimal so that the…

Q: s, which were 1% on the old sakes, would amount to 2% only on incremental sales. Variable Cost is…

A: Given data, Sales =P2,000,000 Days sales outstanding = 2 weeks New sales =50% increase Bad debts =2%…

Q: National Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad…

A: Under Receivable Management in Financial Managent, credit period is stringent if it is beneficial to…

Q: Edward Enterprises is considering relaxing its credit standards to increase its currently sagging…

A: Working Note :- Increase in gross…

Q: AKM Limited has annual credit sales of $20 million with an average collection period is three…

A: The genuine interest rate connected with an asset or loan is described by the effective yearly…

Q: Taylor Company provides the following information: Annual credit sales : $ 24,000,000 Collection…

A: Average collection period means the average time period with in which the debtor makes the payment.…

Q: mine plc has annual credut of k15m and allows 90 days credit. it is consideringba 2% discount…

A: Calculation of Current Interest Cost Note: Since the customers pay back after 90 days, amount due…

Q: The Rama Company is presently having sales of Rs. 108 lakhs. Its existing credit terms are 1/10,…

A: Present data, Sales: Rs108 lacks Contribution margin ratio: 20% Cost of funds: 15% Credit term:…

Q: What will the expected cost of establishing a line of credit be? Round your answer to the nearest…

A: A line of credit is a flexible financing agreement that is often between a bank and a borrower. It…

Q: Ted&Barny Canoes Co. is considering relaxing its credit standards to encourage more sales. As a…

A: Calculation of net profit: Answer: The net profit is increased from $38,950 to $42,818.33 so, the…

Q: Dome Metals has credit sales of $162,000 yearly with credit terms of net 30 days, which is also the…

A: Firm often make strategies to collect account receivables outstanding balance at an early point of…

Q: Based on the limited information above, what would be the net effect of the proposed discount scheme…

A: Savings from Proposed scheme = Reduction in Accounts Receivable x Cost of Capital Reduction in…

Q: ABC would like to hire two loan collectors to speed up its collection process. Each of the loan…

A: Accounts Receivables- It includes those person or entities to whom goods are sold on credit basis or…

Concept explainers

Receivables Management

Question

Dome Metals has credit sales of $198,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume
the firm adopts new credit terms of 4/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts
receivable will be used to reduce the firm's bank loan which costs 8 percent. The new credit terms will increase sales by 20% because
the 4% discount will make the firm's price competitive.
a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a
360-day year.)
Net change in income
b. Should the firm offer the discount?
No
Yes

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Explanation

VIEW

Step 2: Solution

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Dome Metals has credit sales of $288,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 3/18, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 10 percent. The new credit terms will increase sales by 15% because the 3% discount will make the firm's price competitive. a. If Dome earns 20 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) b. Should the firm offer the discount?
Dome Metals has credit sales of $468,000 yearly with credit terms of net 60 days, which is also the average collection period. a. Assume the firm offers a 3 percent discount for payment in 10 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 8 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.) Net change in income b. Should the firm offer the discount? O No Yes
Dome Metals has credit sales of $162,000 yearly with credit terms of net 30 days, which is also the average collection period. a. Assume the firm offers a 2 percent discount for payment in 15 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 8 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.) Loss of: $_________
Campbell Computing Inc. expects to have sales this year of $30 million under its current credit policy. The company offers a credit term of 2/8, net 20. Currently, 60 percent of paying customers take the discount and rest are paying on time. The bad debt loss is 2 percent. The company has a profit margin of 20%, and uses a 5% short-term bank loan to finance its accounts receivables. With 365-day a year assumption, please calculate the following items: a. The bad debt loss of the company this year b. The annual discount given to customers c. The accounts receivables level d. The financing cost of accounts receivables
ABC Corp. has net credit sales of P1,440,000 yearly with credit terms of n/30, which is also the average collection period. BECK does not offer discounts for early payment; thus, customers take the full 30 days to pay. (Use 360 days/year) If BECK offered 2% discount for payment in 10 days and every customer took advantage of the new terms, what would the new averagereceivable balance be? Continuing from the situation in (1), if BECK reduces its bank loans which cost 10%, by the cash generated from reduced receivables, what will be the net gain/loss to the firm?
HAPPY Company makes credit sales of P1,800,000 annually. The average age of accounts receivable is 30 days. Management consider shortening credit terms to 20 days. Cost of money is 12%. How much will the company save from financing charges? Use 360-day year MY ANSWER IS 6,000 AND 12,000. WHAT IS THE CORRECT ANSWER?
Peanut Inc. is evaluating whether to change its credit terms from 2/10 net 30 to 3/10 net 30. At present, 50% of Peanut's sales are paid at day 10. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on day 30 whereas the remainder will pay 15 days late (no bad debts exist). But as a result of the higher cash discount offered with the new terms, sales are expected to increase from 757,000 to 801,000 per year. Peanut's variable cost ratio is 75% and its cost of funds is 8.7%. All production costs are paid on the day of the sale. Should the change be made?
Han Corp's sales last year were $300,000, and its year-end receivables were $49,000. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO. Assume all sales to be on credit. Do not round your intermediate calculations.
Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount. What is the reduction in accounts receivable? What is the opportunity income from the reduction in accounts receivable? What is the discount allowed each year? What is the net benefit of new discount policy each year?
JOKER Company makes credit sales of P1,800,000 annually. The average age of accounts receivable is 30 days. Management consider shortening credit terms to 20 days. Cost of money is 12%. How much will the company save from financing charges? Use 360-day year
Axis Wells and Excavation (AWE) currently generates $110,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $104,000, and accounts receivable will average $13,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSO Existing: days DSO New: days
CA Inc. assumes new customers will default 15 percent of the time but if they don't default, they will become repeat customers who always pay their bills. Assume the average sale is $500 with a variable cost of $350, and a monthly required return of 1.75 percent. What is the NPV of extending credit for one month to a new customer? Assume 30 days per month.