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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S Global Services is considering a promotional campaign that will increase annual credit sales by $450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 2 6 1 All $450,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent. Accounts receivable Inventory a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. Plant and equipment Total Investment times times time b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together. Collection cost…
Peanut Inc. is evaluating whether to change its credit terms from 2/10 net 30 to 3/10 net 30. At present, 50% of Peanut's sales are paid at day 10. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on day 30 whereas the remainder will pay 15 days late (no bad debts exist). But as a result of the higher cash discount offered with the new terms, sales are expected to increase from 757,000 to 801,000 per year. Peanut's variable cost ratio is 75% and its cost of funds is 8.7%. All production costs are paid on the day of the sale. Should the change be made?
Blossom Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $40. Expected sales will increase by 1,000 units per year. The original sales are 11.000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $2.000 per year. The firm will finance the additional investment in receivables by using a line of credit, which charges 5-percent interest. The firm's tax rate is 20 percent. Calculate the NPV. (Assume Blossom benefits from the credit policy change indefinitely.) (Round answer to 2 decimal places, e.g. 15.75. Enter negative amounts using either a negative sign preceding the number eg.-45 or parentheses eg.(45)) NPV $ 513836 Should the firm begin extending credit under the terms described? Yes
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.
mine plc has annual credut of k15m and allows 90 days credit. it is consideringba 2% discount payment with 15 days and reducing the credit period to 60 days. it estimates that 60% of its customers will take advantage of the discount, while the volume of sales will not be affected. tge company finances working capital from an overdraft at a cost of 10%. is the proposed change in policy worth implementing.
Crystals’. currently makes all sales on credit and offers no cash discount. The firm is considering a 3% cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 art pieces per year, selling price is R25 000 per art piece, variable cost per item is R18 750, and the average cost per item is R21 000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 items per year that 75% of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5% of sales. The firm's required return on equal-risk investments is 20%. (Assume a 360-day year). QUESTION 4 What is the cost of marginal investment in accounts receivable under the proposed plan? R246 875 R276 500 R313 460 R368 314
26
A company currently sell goods of Tk. 6,00,000 with a terms of net 30 days. Its average collection period is 45 days. The company is planning to increase its sales by extending the credit period to 60 days on all sales that would help increasing sales by 15%. After the changes in credit policy the average collection period is expected to be 75 days. Variable cost per unit is Tk. 80 and selling price is Tk. 100 per unit. The company’s required rate of return on its investment in receivables is 20%. Should the company extend its credit period?
The sales director of ABC Corp suggest the following credit terms. He estimated the following:Sales will increase by at least 20%AR turnover will be reduced to 8 times from present turnover of 10 times.Bad debts will increase to 1.5%. Current bad debts are 1%.Current sales is P 900,000Variable cost ratio is 55%.Desired rate of return is 20%Fixed expenses is P 150,000What is the net advantage of changing the credit terms?
ABC Office Furniture sells its primary product, an office chair, at R150 per unit. Total credit sales for the previous financial year were 4 000 units. The variable cost to manufacture one chair is R60 and the total fixed costs for the year are R80 000. The entity’s credit terms are 2/10 net 45 and it is considering tightening its credit standards to 3/7 net 30. This is expected to result in a 5% decrease in sales, but bad debt is expected to decrease from 2% of credit sales to 1%. The average collection period is expected to decrease from the current 45 days to 30 days. In the past, 20% of debtors accepted the discount. This percentage is not expected to change. The entity’s cost of capital is 14%. Assume 365 days per year. To calculate the effect of the tightening of credit standards, the entity needs to calculate the following: ■ the profit loss or gain from a decrease or an increase in sales ■ the cost of the marginal investment in accounts receivable ■ the cost of marginal bad…
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.)
The Company has annual turnover of Rs. 25000000 (Of which 60 percent is credit sales). Bad debt is 2 percent of sales. Then how much is the bad debts a. Rs 120000 b. Rs 150000 c. Rs 180000 d. Rs 300000

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