Jonano Corp. (Jonano) is a distributor of household cleaning products to retailers. Jonano's owner, Mandy Himes, has been reviewing Jonano's accounts receivable and she is concerned that the balance is too high and that there is too much capital tied up in accounts receivable. Jonano's operations have grown quickly, and Mandy has NOT been able to put the time into managing the accounts receivable. As such, Mandy is looking for ways to improve the collection of Jonano's accounts receivable. Currently, customers pay in 45 days, on average, and historically, bad debts have been 5% of annual sales (current sales are $5,200,000). Standard practice in the industry is to offer terms of 2/15, net 30 to customers. Mandy is considering a change to the industry standard and estimates that sales will increase 6% annually; the contribution margin on these sales is 53%. Mandy believes that 65% of the customers will take the discount, 32% will pay within 30 days, and 3% will NOT pay and these sales will represent bad debts. Customers can borrow short-term funds from the bank at an annual interest rate of 9% (0.75% per month). Required: a) Identify and describe four factors Mandy should consider in designing an appropriate credit policy for Jonano's customers.. b) Determine the net benefit (or cost) of the accounts receivable policy change to Jonano.
Jonano Corp. (Jonano) is a distributor of household cleaning products to retailers. Jonano's owner, Mandy Himes, has been reviewing Jonano's accounts receivable and she is concerned that the balance is too high and that there is too much capital tied up in accounts receivable. Jonano's operations have grown quickly, and Mandy has NOT been able to put the time into managing the accounts receivable. As such, Mandy is looking for ways to improve the collection of Jonano's accounts receivable. Currently, customers pay in 45 days, on average, and historically, bad debts have been 5% of annual sales (current sales are $5,200,000). Standard practice in the industry is to offer terms of 2/15, net 30 to customers. Mandy is considering a change to the industry standard and estimates that sales will increase 6% annually; the contribution margin on these sales is 53%. Mandy believes that 65% of the customers will take the discount, 32% will pay within 30 days, and 3% will NOT pay and these sales will represent bad debts. Customers can borrow short-term funds from the bank at an annual interest rate of 9% (0.75% per month). Required: a) Identify and describe four factors Mandy should consider in designing an appropriate credit policy for Jonano's customers.. b) Determine the net benefit (or cost) of the accounts receivable policy change to Jonano.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Jonano Corp. (Jonano) is a distributor of household cleaning products to
retailers. Jonano's owner, Mandy Himes, has been reviewing Jonano's accounts
receivable and she is concerned that the balance is too high and that there is too much
capital tied up in accounts receivable. Jonano's operations have grown quickly, and
Mandy has NOT been able to put the time into managing the accounts receivable. As
such, Mandy is looking for ways to improve the collection of Jonano's accounts
receivable.
Currently, customers pay in 45 days, on average, and historically, bad debts have been
5% of annual sales (current sales are $5,200,000). Standard practice in the industry is
to offer terms of 2/15, net 30 to customers. Mandy is considering a change to the
industry standard and estimates that sales will increase 6% annually; the contribution
margin on these sales is 53%. Mandy believes that 65% of the customers will take the
discount, 32% will pay within 30 days, and 3% will NOT pay and these sales will
represent bad debts.
Customers can borrow short-term funds from the bank at an annual interest rate of 9%
(0.75% per month).
Required:
a) Identify and describe four factors Mandy should consider in designing an appropriate
credit policy for Jonano's customers.,
b) Determine the net benefit (or cost) of the accounts receivable policy change to
Jonano.
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