Problem 11 Consider the following information about two alternative credit strategies: Refused Credit P71 P32 Price per unit Cost per unit Quantity sold per quarter Probability of payment 6,200 1.0 Grant Credit P75 P33 6,900 .90 The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90 days, and the cost of debt is .75 percent per month. Required: Based on this information, should credit be granted? b. In (a), what does the credit price per unit have to be a break even? C. In (a), suppose we can obtain a credit report for P1.50 per customer. Assuming that each customer buys one unit and that the credit report correctly identifies all customers who will not pay, should credit be extended?

Problem 11 Consider the following information about two alternative credit strategies: Refused Credit P71 P32 Price per unit Cost per unit Quantity sold per quarter Probability of payment 6,200 1.0 Grant Credit P75 P33 6,900 .90 The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90 days, and the cost of debt is .75 percent per month. Required: Based on this information, should credit be granted? b. In (a), what does the credit price per unit have to be a break even? C. In (a), suppose we can obtain a credit report for P1.50 per customer. Assuming that each customer buys one unit and that the credit report correctly identifies all customers who will not pay, should credit be extended?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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3. Answer the following questions based on the information below Current credit policy(n/a) Proposed credit policy (net 30) Price (RO) 10 12 Variable cost per unit (RO) Quantity 100,000 150,000 Monthly rate 2% What is the incremental cash flows from switching credit policies? a. b. What is the cost of switching? C. What is your recommendation? d. Assume that the variable cost and the price per unit remain constant, what is the break- even sales increase? Interpret.
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How much is the effective cost if you need to borrow $400,000 for one year with $475,000 line credit, where any borrowing have a single payment interest of 20% and there is a 1.5% fee for any unused credit? * 20.28% 17.65% 2.04% O 12% 8.7%
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vi. Subject Finance
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on a a discount basis. Problem 7 COST OF TRADE CREDIT AND BANK LOAN Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60, and it currently pays after 5 days and takes discounts. Lamar plans to expand. which will require additional financing. a) If Lamar decides to forgo discounts how much additional credit could it get and what would be the nominal and effective cost of that credit? P) J the company could get the funds from a bank at a rate of 10%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? (C) Should Lamar use bank debt or additional trade credit? Explain. Page 121 of 161