Question

Shortening the credit period A firm is contemplating shortening its credit period from 30 to 20 days and believes that, as a result of this change, its average collection period will decline from 34 to 27 days. Bad-debt expenses are expected to decrease from 1.5 % to 0.9 % of sales. The firm is currently selling 11,700 units but believes that as a result of the proposed change, sales will decline to 9,600 units. The sale price per unit is $56, and the variable cost per unit is $43. The firm has a required return on equal-risk investments of 25.2 %. Evaluate this decision, and make a recommendation to the firm. (Note: Assume a 365-day year.) The reduction in profit contribution from a decline in sales is $ (Round to the nearest dollar. Enter as a negative number.) The benefit from the reduced marginal investment in A/R is $ (Round to the nearest dollar.) The cost savings from the reduction in bad debts is S (Round to the nearest dollar.) The net profit or loss from implementing the proposed plan is $ (Round to the nearest dollar. Enter a negative number for a loss.) Is the proposed plan recommended? (Select from the drop-down menu.)

Answer 1

Ans 1 = ($27,300) is the contribution margin

Ans 2 Benefit 34-27=7 days A/R= - ($21,265) working capital saved

Ans3 Bad debt continues -but at a lower rate - total savings $4990 for a frugal Veg meal

Ans 4 Net Loss = ($22,310)

Proposed Plan is NOT RCOMMENDED due to

A) The profit margins go up slightly at 22% plus if we close the door outside of the cutoff point . But NOT ENOUGH  to reach the desired 25%.

All basis of calculations as per commonly accepted policies

OLD New Credit Policy elders Change Unit Price 11700 $ $ $ (117,600) 56 43 Sales @ 30 dasy credit Variable Contribution Bad de bts INCOME CREDIT Revenue $ 655,200 $ 503,100 $ 152,100 $ 9,828 $ 142,272 9600 $ $ $ $ $ 537,600 412,800 124,800 4,838 119,962 $ $ $ (27,300) (4,990) 22,310 Reduction in (21,265) working capital 7 days A/R reduction 34/365 0.093 $ 61,032 27/365 0.074 $ 39,768 $ ROI 21.71% 22.31%