Case study: Person SW, thepresident of H industries, has been exploring many ways to increase the financial performance of the company. The sales of H industries were slow. However due to the expansion in the economy, the sales might increase in the future. Person SW has asked Person AP to examine the credit policy of H industries and bring about changes to increase the profitability. Characters in the case: H industries: The manufacturing industry of office equipment Person SW: The president of H industries Person AP: The company’s treasurer To discuss: Whether it is plausible when the default rate and administrative cost are higher in option 3 compared to option 2. Introduction: Credit policy refers to a set of procedures that include terms and conditions for providing goods on credit and principles for making collections. Adequate information: The company has a policy of net 30. The default rate on credit is 1.6%. Person AP came with 3 available options. H industries’ variable cost of production are 45% of sales, the interest rate is 6% of effective annual rate. The options are as follows: Option 1: To relax the decision of the company to grant credit. Option 1 has the following items: The annual sales of $140, default rate of 2.5%, administrative costs of 3.2% and the receivables period of 38 days. Option 2: To increase the credit period to net 45 Option 2 has the following items: The annual sales of $137, default rate of 1.8%, administrative costs of 2.4% and the receivables period of 41 days. Option 3: Combination of relaxed policy and extension of credit period. Option 3 has the following items: The annual sales of $150, default rate of 2.2%, administrative costs of 3.0% and the receivables period of 49 days.

Question

Want to see the full answer?

Answer 1

Question

Chapter 20, Problem 2M

Summary Introduction

Case study:

Person SW, thepresident of H industries, has been exploring many ways to increase the financial performance of the company. The sales of H industries were slow. However due to the expansion in the economy, the sales might increase in the future. Person SW has asked Person AP to examine the credit policy of H industries and bring about changes to increase the profitability.

Characters in the case:

H industries: The manufacturing industry of office equipment

Person SW: The president of H industries

Person AP: The company’s treasurer

To discuss: Whether it is plausible when the default rate and administrative cost are higher in option 3 compared to option 2.

Introduction:

Credit policy refers to a set of procedures that include terms and conditions for providing goods on credit and principles for making collections.

Adequate information:

The company has a policy of net 30. The default rate on credit is 1.6%. Person AP came with 3 available options. H industries’ variable cost of production are 45% of sales, the interest rate is 6% of effective annual rate. The options are as follows:

Option 1: To relax the decision of the company to grant credit.

Option 1 has the following items: The annual sales of $140, default rate of 2.5%, administrative costs of 3.2% and the receivables period of 38 days.

Option 2: To increase the credit period to net 45

Option 2 has the following items: The annual sales of $137, default rate of 1.8%, administrative costs of 2.4% and the receivables period of 41 days.

Option 3: Combination of relaxed policy and extension of credit period.

Option 3 has the following items: The annual sales of $150, default rate of 2.2%, administrative costs of 3.0% and the receivables period of 49 days.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Pam and Jim are saving money for their two children who they plan to send to university.The eldest child will enter university in 5 years while the younger will enter in 7 years. Each child is expected spend four years at university. University fees are currently R20 000 per year and are expected to grow at 5% per year. These fees are paid at the beginning of each year.Pam and Jim currently have R40 000 in their savings and their plan is to save a fixed amount each year for the next 5 years. The first deposit taking place at the end of the current year and the last deposit at the date the first university fees are paid.Pam and Jim expect to earn 10% per year on their investments.What amount should they invest each year to meet the cost of their children’s university fees?

You make a loan of R100 000, with annual payments being made at the end of each year for the next 5 years at a 10% interest rate. How much interest is paid in the second year?