Question

2 (Chapters 6 &7) 6 Saved Help Save & Exit Submit OB1 Sabres Ltd. has determined that product sales are not what they could be because they have unused capacity. As a result, the company is considering adjusting its marketing strategy. At present, all sales to distributors are on a cash basis, but the competition offers credit terms. Similar credit terms for OB1 Sabres have been suggested. Research suggests that sales in the upcoming year would jump from $1.395 million annually to $5,69 million with credit terms of 3/10, net 30. Furthermore, research estimates that 70 percent of the customers would take the discount and the remainder would pay on average on the 30th day. Inventory turnover would remain at 12 times a year. Cost of goods sold (variable costs) are 65 percent of gross sales. Bad debts are estimated to be 0.65 percent of credit sales. Credit department expenses would be $51.900 per year plus the salary of 3 individuals at $36.900 per year each. One of the staff would be reassigned from another division without affecting costs or productivity as that individual is currently redundant in that division. Marketing expenses are 5 percent of gross sales. Bank financing of working capital requirements is at 12 percent a. Should OB1 Sabres Ltd. adopt the proposed policy? O No O Yes b. Show the calculations. (Use 365 days in a year. Do not leave any empty spaces, input a "o" wherever required. Round the answers to the nearest whole dollar. Negative answers and the values to be deducted should be indicated by a minus sign. Enter answers in whole dollar, not in million. Do not round intermediate calculation.) $ A Sales Present policy < Prev 36 of 37 !!! Next > 10:30 PM Ad

Answer 1

CONCLUSION: 12,89,933 Pecagit in Cash policy (Perusht) Perofit in Pocoposed Policy Increase in Profit 13,59,993 70,060 i OB1 Labres Ltd. Should Adopt the policy. ANSWER: YES Scanned by CamScanner

Pecesent Situation (CASH BASIS) [in & SALES (GROSS) 43,95,000 LESS : COST OF Goods SOLD 65.1- of Grcoss Sales (28,56,750) MARKETING EXPENCES 57. og Go Salas (2,19,75o) INTEREST ON BANK FINANCING FOR WORKING CAPITAL REQUIREMENTS (28,567.5) .... WN2 PROFIT/GAIN Rounded off 17,89,932-5 12,89,933 WORKING NOTE: 1. Inventory Twarower Cost of Good Sold Average Inventory 12 times - 28,56,750 Average Inventory Average Inventony = 2,38,062-5 * Average Inventaay Opening Treentory & Closing Incontany - 2. Interest Interest Average Invertory & Rate of = 2,38,062.5 x 121. = 28,567.5 Scanned by CamScanner

PROPOSED POLICY (CREDIT BASIS) [in $] SALES (Gross) 56,90,00u LESS: DISCOUNT 190) .... WN 2 COST OF GOOD SOLD 65.7. of Geocaes Sales (36,98,500) BAD DEBTS 0.65% of Cocedit Sales (11,095.5) ..... WN 3 CREDIT DEPARTMENT GENSES (51,900 ) SALARY OF 3 INDIVIDUALS (36,900 X 3) (1,10,700) MARKETING EXPENSES 5.1. of Gocce Sales (2,84,500) INTEREST ON BANK FINANCING FOR WORKING CAPITAL REQUIREMENT (63 821.12) .... WN4 13,59,993.38 13,59,993 Rounded off Scanned by CamScanner

WORKING NOTE: PROPOSCO POLICY tool. ustomers availing discount option . : Sales - 56,90,000 x 70 % 39,83,000 alue of discount : 3/10 not 3o moana 3% discount if whole payment is made within lo days while max Credit period is 30 days. .: Customcase awarling discourt - 39,83,000 Discount = 31. of 39, 83,000 = 1,19,490 3. Bad dakts : 0.65 % of Gradit Sales Gredit sales = 56,90,000 - 39,83,000 = 17,07,000 Bad dokt = 17,07,000 X 0.65% = 11,095.5 4. Bank Financing Areenage + Average x Rate of Interest I Inwertowy debtous) Interest = 4,48,509.37 X 12%. = 53,821-12 Alecrage Inventory = Cost of Goods Sold Inventory Tuchower 36,98,500 = 3,08, 209 12 Average Dablows = Godit Sales y 3o 365 17,07,00 X 30 = 1,40,301.37 365 - Scanned by CamScanner