SMS Co. has sales of P3 million. Itscredit period and average collectionperiod are both 30 days and 1% of itssales end up as bad debts. Thegeneral manager intends to extendthe credit period of 45 days whichwill increase sales by P300,000.However, bad debts losses on theincremental sales would be 3%. Costsof products and related expensesamount to 40% exclusive of the costof carrying receivables of 15% andbad debts expenses. Assuming 360days a year, the change in policywould result to incrementalinvestments in receivables ofP24,704P65,000P162,500P701,573

Average collection period is period required to collect payment from customers.

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

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

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 2 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are currently $1,000,000, variable cost is $600,000 (note the variable cost % is 60%). The firm expects that the change in credit terms will result in an increase in sales to $1,500,000 per year and variable costs will increase to $900,000 per year. Fizzy projects that 80 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's required return on equal-risk investments is 10 percent. (Assume a 360-day year.) What is the cost (benefit) of the marginal cash discount? O ($18,000) O $24,000 ($22,000) O $30,000
ABC Limited has annual sales of Rs. 50 lacs. The selling price per unit is Rs. 50 per unit and the variable costs is 70% of the selling price. The required rate of return on investment is 20%, average cost per unit is Rs. 40 per unit. Annual collection expenditure is Rs. 60000 and default % is 5%. The credit terms offered by the company is 60 days. The Company is considering change in the credit policy and the expected impact is as follows: Option 1 Collection Period: 45 days Collection expenditure:75000 Default%: 3% Option 2 Collection Period: 30 days Collection expenditure: 140000 Default%: 1% Advise the company on the selection of the Options.
XYZ, Inc., produces and commercializes engines for cars. To stimulate sales, the financial manager is contemplating lengthening its credit period from the existing net 30 terms to net 35 terms. The credit analyst estimates that the new credit policy increases sales by 15 percent. The financial manager asks you to analyze the impacts of the proposed credit change on the firm's value. The variable costs, as a percent of sales, equal 70%. The existing monthly credit sales is $90 million. The existing bad debt loss rate is 29% and will increase by o.75% after lengthening the credit period. The existing credit & collection expenses equal 2.5% of sales and those under 35-day terms will be 3% of sales. The company's cost of capital is presently 10 percent Under the new credit policy, the firm offers a 2% cash discount if they pay within one week and the percent of sales made to cash discount-takers will be 15%. 1) Calculate the NPV of one day's sales under the existing credit policy
A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing. A. Calculate the cash conversion cycle before the lockbox system B. Calculate the cash conversion cycle after the lockbox system C.
Ascenda Corp. distributes the "Smart" brand of electronic controller systems. The company currently has a credit policy of 1/10, net 40, though an average only 20% of the customers pay in 10 days and take the discount, while another 30% pay on avorage in 15 days yet still take the unearned discount. The company's remaining customers pay on average in 50 days. Bad debt losses are 3% of sales. The company's sales are currently $600,000 per month, all on credit. Ascenda is thinking of restructuring its credit and collections department, with the goal of eliminating all unearned discounts and reducing bad debt losses to 1.5%. With this new policy, the company believes that sales will fall by 5% and 40% of the customers will pay in 10 days and obtain the discount, and that the remaining customers will pay in 40 days. Ascenda's variable costs are 60% of sales, its monthly collections department expense is expected to rise by $6,000 to $20,000, and its opportunity cost on funds is 12%…
Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of "net 120." Its average collection period is 150 days. The company is con- sidering the introduction of a 4 percent cash discount if customers pay within 30 days. Such a change in credit terms is expected to reduce the average collection period to 108 days. Epstein expects 30 percent of its customers to take the cash discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667, and its required pretax return on receivables investment is 15 percent. The company does not expect its inventory level to change as a result of the change in credit terms. Determine the net effect on Epstein's pretax profits. Instruction: Please key in the relevant information in the blue cells in the Data Section. Then type formulas in the yellow cells to determine the net effect on Epstein's pretax profits. Data Section Cash discount Percent of customers taking discount Current average…
4- A manufacturer currently prices its product at 10 TL per unit. Last year, the manufacturer sold 60.000 units. The variable cost per unit is 6 TL. Total fixed costs are 120.00O TL. The manufacturer intends to increase sales by 5%. Current accounts receivable collection period is 30 days. If the manufacturer wants to relax its credit standards, the expectation is that bad debt expenses will increase from 1% of sales to 2% of sales. The opportunity cost of investing in accounts receivables is 15%. In order to benefit from relaxing its credit standards, what would be the expected maximum accounts receivable collection period? (Assume that existing customers are not expected to alter their payment habits. 1 year = 365 days) 82,38 days 63,33 days 105,82 days O 63,73 days
KK Corporation resells one product to a small isolated community. It sells an average of 60 sacks, but may sell as low as 20 sacks and as high as 75 sacks each day. The supplier charges P500 per sack and an additional fixed cost of P1,300 for deliveries. It takes an average of ten days for orders to arrive. Investment in inventory are funded thru debt and equity at a weighted average cost of capital of 14%. How much would the minimum total annual inventory-related costs that KK would incur if it applies the reorder point and EOQ models? Use 365 days.
Rancor Electronics sells 5,000 mp3 players and earns Tk.2.5 million in revenues. Rancor’s variable costs are Tk.600,000 and its fixed operating costs are Tk.1.52 million. How many mp3 players does Rancor have to sell recover all its operational costs? Can Rancor earn a larger increase in operating income by making a smaller increase in sales? Suppose Rancor has Tk.1 million in debts at a 10 percent rate of interest and is subject 38 percent tax rate. How many mp3 players will Rancor have to sell in order attain its financial breakeven point?
RAF is currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm’s current average collection period is 60 days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm’s required rate of return on equal-risk investments is 25%, should the proposed discount be offered? (Note: Assume a 360-day year.)
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 %

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