Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 22, Problem 9MC

Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses.

The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%.

To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.

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Stan Inc. currently asks its credit customers to pay by the end of the month after the month of delivery. In practice, customers take rather longer to pay - on average 70 days. Sales revenue amounts to P 8 million a year and bad debts to P 20,000 a year. The company planned to offer customers a cash discount of 2% for payment within 30 days. Stan estimates that 50% of customers will accept this facility but that the remaining customers, who tend to be slow payers, will not pay until 80 days after the sale. At present the business has an overdraft facility at an interest rate of 12% a year. If the plan goes ahead, bad debts will be reduced to P 10,000 a year and there will be savings in credit administration expenses of P 6,000 a year. (Use 360 days) How much is the net cost/benefit of the proposed policy? A.P 24,000B.(P 24,000)C.(P11,370)D.P2,630
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Cash & Credit Supermarket Inc. currently asks its credit customers to pay by the end of the month after the month of delivery. In practice, customers take rather longer to pay – on average 70 days. Sales revenue amounts to ₱ 8 million a year and bad debts to ₱ 20,000 a year. The company planned to offer customers a cash discount of 2% for payment within 30 days. Cash & Credit Supermarket estimates that 50% of customers will accept this facility but that the remaining customers, who tend to be slow payers, will not pay until 80 days after the sale. At present the business has an overdraft facility at an interest rate of 12% a year. If the plan goes ahead, bad debts will be reduced to ₱ 10,000 a year and there will be savings in credit administration expenses of ₱ 6,000 a year. (Use 360 days) How much is the net cost/benefit of the proposed policy?Required to answer. Single choice. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine…
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