If the cost of goods sold is 73% of the selling price, what is the expected profit on the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the cost of goods sold is 73% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Should Mr. Procrustes adopt the more stringent policy?

If the cost of goods sold is 73% of the selling price, what is the expected profit on the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the cost of goods sold is 73% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Should Mr. Procrustes adopt the more stringent policy?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 15P

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As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6.7%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4.7%. Assume current sales are $100. a. If the cost of goods sold is 73% of the selling price, what is the expected profit on the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the cost of goods sold is 73% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A Zack Firm is evaluating an Accounts Receivable Change that would increase Bad Debts from 2% to 4% of Sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the Variable Cost per unit is $15. As a result of the proposed change, sales are forecast to increase to 60,000 units. A. What are Bad Debts in Dollars currently? (Format: 11,111) B. What are Bad Debts in Dollars under the Proposed Change? (Format: 11,111) C. Calculate the Cost of the Marginal Bad Debts to the firm. (Format: 11,111)
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?
Tyres Ltd sells tyres on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 11 days. It is expected that this will change to 40 days under the new standards. Sales are expected to increase from R100m to R105m. No discounts are offered and bad debts are negligible (zero). The company can borrow short term funds at a rate of 10% and has a gross profit margin of 15%. What would the net effect of changing its credit standards on its net profit be? a.-R841 096 b. -R91 096 c. R750 000 d. R1 500 000
Axis Wells and Excavation (AWE) currently generates $198,000 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 $189,000, and accounts receivable will average $12,600. 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. DSOExisting: days DSONew: days
Rose Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are P11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? P32,964 P40,370 P36,526 P34,699 P38,448
Rose Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short- term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are P11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? P32,964 P36,526 P40,370 P34,699 P38.448
JJ Corporation is analyzing its option to restrict its credit terms. Current sales level is P6,000,000, average receivables balance is P500,000, bad debts on sales is 10%. With the new policy, sales will be P5,000,000, average receivables balance will be P200,000, and bad debts on sales will be 2% The variable cost rate is 60% and the effective cost of capital is 13%. Based on these available information, what is the net benefit/(cost) of ihis change in policy?
Dallas Company's current ratio is 4 to 3. The company is negotiating a loan, and the company's management understands that a higher (i.e., better) current ratio will reduce the company's cost of borrowing (interest rate). Which of the following transactions will improve Houston Company's current ratio? Select one: a. making a payment on a long-term debt b. using cash to pay current liabilities c. purchasing inventory on account d. collecting on some of the company's accounts receivable e. none of the above
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
Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in replaying credit extended to them. This policy results in lost sales of $10 million annually. Based on past experiance with these types of customers, the firm estimates that the average collection period would be a 90 days and that the bad-debt loss ratio would be 6 percent. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opporunity cost) on receivables investments is 20 percent. When converting form annual to daily or vice versa, assume there is a 365 days per year. If Bluegrass Disilleries extends credit to these (previously delinquent) customers, determine the incrase in the investment in receivables.
Upon further investigation, you have found that the amount of account payables for Companies A and X at the start of the lyear is 20,000 and 30,000, respectively. Apart from that, the amount of credit purchase for Companies A and B is 250,000 and 280,000, respectively. Based on all this information, recommend on which company that gire lower risk to your company. The recommendation must be ustified by the following analysis: a) hiquidity analysis. b) Solvency analysis. c) Any other financial analysis that you think can help in making your decision. Table: Balance Sheet for Company A and Company B Assets Fixed Assets Other Non-Current Assets Account Receivables Inventory Cash 250,000 80,000 120,000 80,000 120,000 650,000 280,000 110,000 140,000 100,000 100,000 ТОTAL 730,000 Liabilities Саpital Long Term Debt Account Payables Other Current Liabilities ТОTAL 250,000 120,000 160,000 120,000 650,000 280,000 140,000 180,000 130,000 730,000