Michael Corporation spends Php 220,000 per annum on its collection department. The company has Php 12M in credit sales. Its average collection period is 2.5 months, and the percentage of bad debts loss is 4%. The company believes that if it were to double its collection personnel, it could bring down the average collection period to 2 months and bad debt losses to 3%. The added cost is Php 180,000, bringing total expenditures to Php 400,000 annually. Is the increased effort worthwhile if the opportunity cost of funds is 20%? If it is 10%?
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- Michael Corporation spends Php 220,000 per annum on its collection department. The company has Php 12M in credit sales. Its average collection period is 2.5 months, and the percentage of
bad debts loss is 4%. The company believes that if it were to double its collection personnel, it could bring down the average collection period to 2 months and bad debt losses to 3%. The added cost is Php 180,000, bringing total expenditures to Php 400,000 annually.
Is the increased effort worthwhile if the opportunity cost of funds is 20%? If it is 10%?
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Solved in 2 steps
- Inc. currently fills mail orders from all over the country and receipts were received in its head office. The company’s average accounts receivable is P3,125,000 and is financed by a bank loan with 10% interest. Inc. is considering a regional lockbox system to speed up collections. This system is projected to reduce the average accounts receivable by 15%. The annual cost of the lockbox system is P25,000. What is the estimated net annual savings in implementing the lockbox system? P28,455P22,985P25,750P21,875SMS Co. has sales of P3 million. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period of 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. Assuming 360 days a year, the change in policy would result to incremental investments in receivables of P24,704 P65,000 P162,500 P701,573A product sells for ₱100 per unit and has a contribution margin of ₱45 per unit. Monthly fixed expenses total ₱350,000. The firm obtained a loan amounting to ₱250,000 with an interest rate of 11% per annum. The firm desires a profit after tax of ₱275,000 for the month. Tax rate is 25%. How many units must be sold for the month?
- The Fierro Corporation has annual credit sales of $6 million. Current expenses for the collection department are $100,000, bad debt losses are 4 percent, and the days sales outstanding is 30 days. Fierro is considering easing its collection efforts so that collection expenses will be reduced to $50,000 per year. The change is expected to increase bad debt losses to 7 percent and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $8 million per year. Should Fierro relax collection efforts, if the opportunity cost of funds is 10 percent, the variable cost ratio is 75 percent, and its marginal tax rate is 30 percent? All costs associated with production and credit sales are paid on the day of the sale.Bulldogs Inc. currently fills mail orders from all over the country and receipts were received in its head office. The company’s average accounts receivable is P3,125,000 and is financed by a bank loan with 10% interest. Bulldogs is considering a regional lockbox system to speed up collections. This system is projected to reduce the average accounts receivable by 15%. The annual cost of the lockbox system is P25,000. What is the estimated net annual savings in implementing the lockbox system? P22,985 P25,750 P28,455 P21,875Smith Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year)* A. 171k B. 177,750 C. 161,250 D. 106k
- Animal Kingdom is evaluating the extension of credit to a new grouo of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset build up will be required to service the new customers. The firm has a 10% desired return on investment. Should it extend credit to these customers and should credit be extended if the receivables tumover drops to 1.5 and all other factors are the same? Can you please show me an explanation and a solution for this? Thank you so much!Bulldogs Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year)Bulldogs Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year) A. P177,750 B. P106,000 C. P171,000 D. P161,250
- SHE CO. currently has annual sales of P2,000,000. Its average collection period is 40 days, and bad debts are 5 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year. What would be the incremental investment in receivables if the change were made?The Sandbox Company is planning to increase its level of collection expenditures form the current P250,000 to P400,000, on credit sales of P24,000,000. This move is expected to accelerate payments and increase turnover of receivables from 8 to 12 times and cut bad debts from two percent to one percent of credit sales. The opportunity cost of funds is 12 percent. The company uses a 360-day year in planning and controlling. Required: Calculate the following (show your solution): 1. Receivables turnover before and after the change in the collection policy. 2. Average receivable balance before and after the change in collection policy. 3. Net advantage or disadvantage of the new collection policyA company obtains an annual revenue of R300 000. The annual cost of goods sold is R120 000. The expenses are made up as follows: Salaries = R50 000 Telephone and internet services = R8 000 %3D Water and lights = R10 000 Stationery = R5 000 Bank charges = R500 Compile a budget for this company showing the Gross profit and Net profit both in Rands and as a percentage value.