Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of "net 120." Its average collection period is 150 days. The company is con- sidering the introduction of a 4 percent cash discount if customers pay within 30 days. Such a change in credit terms is expected to reduce the average collection period to 108 days. Epstein expects 30 percent of its customers to take the cash discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667, and its required pretax return on receivables investment is 15 percent. The company does not expect its inventory level to change as a result of the change in credit terms. Determine the net effect on Epstein's pretax profits. Instruction: Please key in the relevant information in the blue cells in the Data Section. Then type formulas in the yellow cells to determine the net effect on Epstein's pretax profits. Data Section Cash discount Percent of customers taking discount Current average collection period Average collection period after initiating the discount Annual credit sales variable cost ratio Required pretax return on accounts receivable investment Change in inventory level Impact Of Change On Pre-Tax Profits Reduction in accounts receivable Earnings on released funds from accounts receivable Direct cost of the discount Net change in pretax profit
Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of "net 120." Its average collection period is 150 days. The company is con- sidering the introduction of a 4 percent cash discount if customers pay within 30 days. Such a change in credit terms is expected to reduce the average collection period to 108 days. Epstein expects 30 percent of its customers to take the cash discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667, and its required pretax return on receivables investment is 15 percent. The company does not expect its inventory level to change as a result of the change in credit terms. Determine the net effect on Epstein's pretax profits. Instruction: Please key in the relevant information in the blue cells in the Data Section. Then type formulas in the yellow cells to determine the net effect on Epstein's pretax profits. Data Section Cash discount Percent of customers taking discount Current average collection period Average collection period after initiating the discount Annual credit sales variable cost ratio Required pretax return on accounts receivable investment Change in inventory level Impact Of Change On Pre-Tax Profits Reduction in accounts receivable Earnings on released funds from accounts receivable Direct cost of the discount Net change in pretax profit
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on
terms of "net 120." Its average collection period is 150 days. The company is con-
sidering the introduction of a 4 percent cash discount if customers pay within 30
days. Such a change in credit terms is expected to reduce the average collection
period to 108 days. Epstein expects 30 percent of its customers to take the cash
discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667,
and its required pretax return on receivables investment is 15 percent. The company
does not expect its inventory level to change as a result of the change in credit
terms. Determine the net effect on Epstein's pretax profits.
Instruction: Please key in the relevant information in the blue cells in the Data Section. Then type
formulas in the yellow cells to determine the net effect on Epstein's pretax profits.
Data Section
Cash discount
Percent of customers taking discount
Current average collection period
Average collection period after initiating the discount
Annual credit sales
variable cost ratio
Required pretax return on accounts receivable investment
Change in inventory level
Impact Of Change On Pre-Tax Profits
Reduction in accounts receivable
Earnings on released funds from accounts receivable
Direct cost of the discount
Net change in pretax profit
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