Problem 7-20 (Algo) Credit policy decision with changing variables [LO7-4]Slow Roll Drum Company is evaluating the extension of credit to a new group of customers. Although these customers will provide$432,000 in additional credit sales, 9 percent are likely to be uncollectible. The company will also incur $17,500 in additional collectionexpense. Production and marketing costs represent 77 percent of sales. The firm is in a 35 percent tax bracket. No other asset buildupwill be required to service the new customers. The firm has a 12 percent desired return. Assume the average collection period is 180days.a. Compute the return on incremental investment.Note: Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.Return on incremental investment%

Accounts receivable refers to the outstanding payments that a business is owed by its customers or…

Answered: Slow Roll Drum Company is evaluating…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 12P

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Relaxing Collection Efforts The Boyd Corporation has annual credit sales of 1.6 million. Current expenses for the collection department are 35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing 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 are expected to increase to 1,625,000 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 40%?
Jamboo Corporation is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230009 if credit is extended. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 75 percent of sales. The firm needs to pay 1,500 tax on additional sales. Compute Net income after tax. ANSWER FORMAT: 1234.56 Answer:
Sunny Manufacturing is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. a. Compute the incremental income before taxes. $ Incremental income before taxes b. What will the firm's incremental return on sales be if these new credit customers are accepted? (Round the final answer to 2 decimal place.) Incremental return on sales % c. If the receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Sunny Manufacturing's incremental return on new average investment be? (Do round intermediate calculations. Round the final answer to the nearest whole percentage.) Incremental return on new average investment %
eBook Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $360,000, and the average collection period (DSO) is 60 days. Lewis estimates tightening the credit terms will reduce annual sales to $356,000, but accounts receivable would drop to 35 days of sales. Lewis' variable cost ratio is 60 percent and its average cost of funds is 9 percent. Should the change in credit terms be made? Assume all operating costs are paid at the time inventory is sold and all sales are collected at the DSO. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to the nearest cent. The NPV for the existing credit policy, that is $ , is the NPV for the proposed credit policy, that is $ . Thus, Lewis Lumber change its credit policy.
Sisa Corporation has the following data: Selling price per unit Variable cost per unit. P70 Variable Cost per unit P45 Annual credit sales - units. 50,400 Collection period. 30 days Rate of return 20% Sisa Corporation is considering easing its credit standards. If it does, sales will increase by 25%; collection period will increase to 45 days; bad debts losses are anticipated to be 4% of the incremental sales; and collection costs will increase by P31,645. If the proposed relaxation in credit standards is implemented, the net benefit (loss) for Sisa Corporation is
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $270,000 if credit is extended to these new customers. Of the new accounts receivable generated, 9 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. 1. Compute the incremental income before taxes. 2. What will the firm’s incremental return on sales be if these new credit customers are accepted? (Round final answer to 2 decimals) 3. If the receivable turnover ratio is 5 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson Electronics’ incremental return on new average investment be? (Round only the final answer to %)
Effective Cost of Trade Credit The D.J. Masson Corporation needs to raise $600,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 2/10, net 70, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 70th day, and thereby obtain the needed $600,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. Cost of Bank loan Mary Jones recently obtained an equipment loan from a local bank. The loan is for $22,000 with a nominal interest rate of 14%. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly payments on the loan, and the loan is to be repaid in 1 year. What is the effective annual rate on the loan (assuming a 365-day year)? Do not round intermediate calculations. Round your answer…
Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm’s equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.) Calculate the additional profit contribution from sales that the firm will realize if it makes the proposed change. What marginal investment in accounts receivable will result? Calculate the cost of the marginal investment in accounts receivable. Should the firm implement the proposed change? What other information would be helpful in your analysis?
Quantitative Problem: Adams Manufacturing Inc. buys $9.1 million of materials (net of discounts) on terms of 2/10, net 50; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to the nearest cent.$ What would be the nominal and effective cost of such a credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.Nominal cost: %Effective cost: % If the company could receive the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places. % Should Adams use bank debt or additional trade credit?
Zed’s Textiles currently has Credit Sales of $360 million per year and an Average Collection Period of 60 days. Assume that the price of Zed’s products is $60 per unit and that the Variable Costs are $55 per unit. The firm is considering accounts receivable changes that will result in a 20% increase in sales and a 20% increase in the Average Collection Period. No change in Bad Debts is expected. The firm’s equal-risk Opportunity Cost on its investment in Accounts Receivable is 14%. (Note: Use a 365-day year) A. Calculate the Additional Profit Contribution from sales that the firm will realize if it makes the proposed change. (Format: 1,111,111) B. What Marginal Investment in Accounts Receivable will result? (Format: 1,111,111) C. Calculate the Cost of the Marginal Investment in Accounts Receivable. (Format: 1,111,111)
Problem 7: Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and the variable cost per unit is $28. Regency expects that if it does relax its credit standards, the average collection period will increase to 48 days and that bad debts will increase to 1.5% of sales. Sales will increase by 4,000 repairs per year. If the firm has a required rate of return on equal-risk investments of 14%, what recommendation would you give the firm? Use your analysis to justify your answer. (Note: Use a 365-day year.)

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