Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 22, Problem 6P
Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit.
Vinson’s variable cost ratio is 85%, and taxes are 40%. If the interest rate on funds invested in receivables is 18%, should the change in credit terms be made?
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Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation, was
alarmed to find that Vinson sells on credit terms of net 90 days while
industry-wide credit terms have recently been lowered to net 30 days.
On annual credit sales of $2.18 million, Vinson currently averages 95
days of sales in accounts receivable. Mitchell estimates that tightening
the credit terms to 30 days would reduce annual sales to $2,055,000,
but accounts receivable would drop to 35 days of sales and the savings
on investment in them should more than overcome any loss in profit.
Vinson's variable cost ratio is 82%, taxes are 40%, and the interest rate
on funds invested in receivables is 21%. Assuming a 365-day year,
calculate the cost of carrying receivables under the current policy and
the new policy. Enter your answers as positive values. Do not round
intermediate calculations. Round your answers to the nearest dollar.
Current policy: $
New policy:
Should the change in credit terms be…
Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.32 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,195,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Assume that Vinson’s variable cost ratio is 79%, taxes are 40%, and the interest rate on funds invested in receivables is 18%.
Assuming a 365-day year, calculate the net income under the current policy and the new policy. Do not round intermediate calculations. Round your answers to the nearest dollar.
Current policy: $
New policy: $
Should the change in credit terms be made?
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?
Chapter 22 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 22 - Prob. 1QCh. 22 - Prob. 2QCh. 22 - Is it true that if a firm calculates its days...Ch. 22 - Firm A had no credit losses last year, but 1% of...Ch. 22 - Indicate by a (+), (), or (0) whether each of the...Ch. 22 - Cost of Bank Loan On March 1, Minnerly Motors...Ch. 22 - Cost of Bank Loan Mary Jones recently obtained an...Ch. 22 - Del Hawley, owner of Hawleys Hardware, is...Ch. 22 - Gifts Galore Inc. borrowed 1.5 million from...Ch. 22 - Relaxing Collection Efforts The Boyd Corporation...
Ch. 22 - Tightening Credit Terms Kim Mitchell, the new...Ch. 22 - Effective Cost of Short-Term Credit Yonge...Ch. 22 - Monitoring of Receivables
The Russ Fogler Company,...Ch. 22 - Prob. 10PCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MCCh. 22 - Prob. 6MCCh. 22 - Prob. 7MCCh. 22 - Assume that it is now July of Year 1 and that the...Ch. 22 - Now assume that it is several years later. The...Ch. 22 - Prob. 10MCCh. 22 - Prob. 11MCCh. 22 - Prob. 12MCCh. 22 - Prob. 13MCCh. 22 - Prob. 14MCCh. 22 - Suppose the firm makes the change but its...
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