(e) Estimate the cost of additional investment in account receivable and inventory associated with the proposed change in credit policy. (f) Estimate the change in the cost of the cash discount if the proposed change in credit policy is enacted. (g) Compare the incremental revenues with the incremental costs. should the propose change be enacted?
Your first major assignment after your recent promotion at Ice Nine involves overseeing the
| New sales level (all credit) | $8,000,000 |
| Original sales level (all credit) | $7,000,000 |
| Contribution margin | 25% |
| Percent bad debt losses on new sales | 8% |
| New average collection period | 75 days |
| Original average collection period | 60 days |
| Additional investment in inventory | $50,000 |
| Pre-tax required |
15% |
| New percent cash discount | 2% |
| Percent of customers taking the new cash discount | 50% |
| Original percent cash discount | 1% |
| Percent of customers taking the old cash discount | 50% |
To help in your decision on relaxing credit terms, you have been asked to respond to the following questions:
(a) What determines the size of the investment Ice Nine makes in accounts receivables?
(b) If a firm currently buys Ice Nine on trade credit with the present terms of 1/50, net 70 and decides to forgo the trade credit discount and pay on a net day, what is the annualized cost to that firm of forgoing the discount?
(c) If Ice Nine changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Ice Nine and decides to forgo the trade credit discount and pay on a net day?
(d) What is the estimated change in profits resulting from the increased sales less any additional
(e) Estimate the cost of additional investment in account receivable and inventory associated with the proposed change in credit policy.
(f) Estimate the change in the cost of the cash discount if the proposed change in credit policy is enacted.
(g) Compare the incremental revenues with the incremental costs. should the propose change be enacted?
please answer E,F,and G
thanks
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