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%?

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%?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 33P

See similar textbooks

Similar questions

The Tortuga Corp has annual credit sales of $2.5 million. Current expenses for the collection department are $40,000, bad-debt losses are 1.5%, and the days sales outstanding is 35 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $18,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 61 days. In addition, sales are expected to increase to $2.6 million per year. Should the firm relax collection efforts if the opportunity cost of funds is 16%, the variable cost ratio is 75%, and taxes are 25%? O No, profits fall by $2.907 O No, profits fall by $5.509 Yes, profits grow by $2,907 O Yes, profits grow by $5,509
The Boyd Corporation has annual credit sales of $1.6 million. Currentexpenses for the collection department are $35,000, bad-debt losses are1.5%, and the days sales outstanding is 30 days. The firm is consideringeasing its collection efforts such that collection expenses will be reduced to$22,000 per year. The change is expected to increase bad-debt losses to 2.5%and to increase the days sales outstanding to 45 days. In addition, sales areexpected to increase to $1,625,000 per year.Should the firm relax collection efforts if the opportunity cost of funds is16%, the variable cost ratio is 75%, and taxes are 40%?
The Boyd Corporation has annual credit sales of $2.8 million. Current expenses for the collection department are $38,000, bad debt losses are 1.6%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $23,000 per year. The change is expected to increase bad - debt losses to 2.6% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,825,000 per year. Suppose that the opportunity cost of funds is 18%, the variable cost ratio is 65%, and taxes are 40%. 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.
SMS 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 P701,573
ALei Industries has credit sales of $146 million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 35 days. a. What is the maximum level of accounts receivable that ALei can carry and have a 35-day average collection period? b. If ALei's current accounts receivable collection period is 55 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 35 days?
Aaish-o-Ishrat Technology is considering changes in the working capital policies to improve its cash flow cycle. The company's sales last year were Rs 3,250,000 (all on credit) and its net profit margin was 7%. Its inventory turnover was 6.0 X during the year, and its DSO was 41 days. The annual cost of goods sold was Rs 1,800,000. The company has fixed assets totaling Rs 535,000. The company's payables deferral period is 45 days. Required: (a) Calculate the company's cash conversion cycle. (b) Assuming the company hold a negligible amount of cash and marketable securities , calculate its total asset turnover, and ROA. (c) Suppose the company's managers believe the annual inventory turnover can be raised to 9 times without affecting sales, what will be the company's cash conversion cycle, total assets turnover, and ROA have been if inventory turnover had been 9 times for the year?
It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts that next year's sales will be $86,400,000. Its fixed costs have been-and are expected to continue to be-$44,000,000, and its variable cost ratio is 10.00 %. Galaxy's capital structure consists of a $15 million bank loan, on which it pays an interest rate of 12%, and 5,000,000 shares of outstanding common equity. The company's profits are taxed at a marginal rate of 35%. The following are the two principal equations that can be used to calculate a firm's DFL value: DFL (at EBIT = $X) = Given this information, complete the following sentences: Percentage Change in EPS Percentage Change in EBIT Consider the following statement about DFL, and indicate whether or not it is correct. 0 0 DFL (at EBITSX) = • The company's percentage change in EBIT is . The percentage change in Galaxy's earnings per share (EPS) is • The degree of financial leverage (DFL) at $86,400,000 is. (Hint: Use the changes in EPS…
Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $3.7 million and is financed by a bank loan with 12.5 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 23 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system?
Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $3.7 million and is financed by a bank loan with 12.5 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 23 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? Give me Answer
Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $3.7 million and is financed by a bank loan with 12.5 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 23 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? I want Solution
Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $3.7 million and is financed by a bank loan with 12.5 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 23 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? Give answer to this accounting problem
2