Chapter 21, Problem 5R

The following four suggestions have been made to improve the company’s cash position. Evaluate the effect on cash flow for each of the four suggestions. After evaluating each suggestion, enter the projected cash balances in the spaces provided. Consider each suggestion separately. Reset cells to their initial values after each new suggestion.

1. a. Seek agreement with suppliers to extend the credit period to 30 days. This would mean that all current monthly purchases would be paid for in the following month.
2. b. Raise the unit price from $28 to $30. A price increase will reduce unit sales by 10% each month. Unit purchases will also be reduced by 10%.
3. c. Put the company’s two salespeople on straight commission. This would reduce fixed marketing and administrative costs to $1,500 per month and raise variable marketing and administrative costs to $7 per unit.
4. d. Increase the cash discount from 5% to 10%. It is anticipated that this would increase the percentage of customers paying within the discount period to 85%, and those paying the month after the discount period would drop to 8%. Five percent would pay in the following month and 2% would still be uncollectible.

What are your recommendations for Sweet Pleasures, Inc.? Consider potential impact on profits as well as cash balances.