Question

Logan Distributing Company of Atlanta sels fans and heaters to retail outlets throughout the Southeast. Joe Logan, the president of the company, is thinking about changing the firm's credit policy to attract customers away from competitors. The present policy calls for a 1/10, net 30 cash discount The new policy would call for a 3/10, net 50 cash discount. Currently. 30 percent of Logan customers are taking the discount, and it is anticipated that this number would go up to 50 percent with the new discount policy It is further anticipated that annual sales would increase from a level of $399,000 to $601,500 as a result of the change in the cash discount policy The increased sales would also affect the inventory level. The average inventory carried by Logan is based on a determination of an EOO. Assume sales of fans and heaters increase from 14,920 to 22,400 units. The ordering cost for each order is $197, and the carrying cost per unit is $1.55 (these values will not change with the discount). The average inventory is based on EOQ2. Each unit in inventory has an average cost of $12 Cost of goods sold is equal to 65 percent of net sales: general and administrative expenses are 15 percent of net sales, and interest payments of 14 percent will only be necessary for the increase in the accounts receivable and inventory balances Taxes will be 40 percent of before-tax income For average collection period, assume the customer pays on the last day possible (f they are getting the discount, that is day 10, it not, that is day 30 with the original policy and day 50 with the proposed policy) Part A Compute the accounts receivable balance before and after the change in the cash discount policy Use the net sales (total sales minus cash dscounts) to detemine the aveage daly sales Round your answer to the nearest whole dollar What is the accounts receivable balance before the change? What is the accounts receivable balance after the change?

Answer 1

A)

Account receivable = averape collection rawerge deulytalles Period Before the change 30% of 10 days = 3 70% 6h 30 days 21 o totalt 24 Caverope allount reuwable) Daily sales(averape) - (assuminy 360 days) Balloo uudit. sales-Discount 360 399,000 - (1% 0% 30% of 399,000) 360 ~ 399,000 – (0.01 x ,030 X 399,000) 360 Average daily salesz $1105 Account recevable = 24 days X $1105 =$26520 After the change awerage collections peuvod 0.50 to = 5 50 x 50 = 25 30 days

50% of 1 Average daily sales ou dit sales - discount - $601,00 - 360 days 601,00o) $$ 1601000 - (0.33 X0,5 x 601,000) 360 11on Average daily sales =$1644,40 Account Receivable led with after change 3 odays $1644.40 $49332. 08 CamScanner

B E0Q2 2 x Annual material cost x oudoune cout 7 Carreyeng cost Before' chauye EOQ = 2 x 14920 x 197 1.55 Given : - Before sales quantity : 14920 Ordering cost- 197 carrying cost 21.55 EoQ2 1947 145 units ř 1947 units After chance EOQ 2 2 x 22400 x 197 1.55 Given after sales = 22,400 ordening cost 2 197 Carrying cast 1.55 EOQL = 2386.19 units ♡ 2386 units Average inventory Before change - 1947 = 973.5 ~ 974 now, 974 x cost Puig 974 412 - 11688 After change 2386 =11931 now, 1193x cost = 1193x12 = 14316 2 Scanned with

atter change 59198 384790.25 207194.75 Before change Wer sales (sales - Calh du colent) 397803 7 cout of goods sold (654) 258571.95 → Grols puofit 139231.05 Gencial & administratie eppenser operating profit Interest on unveiase un accelent Meceivable and unventory (14) Income before taxes 79560.6 7 Tapes (40%) 31824.24 Income after taxes 47736.36 (15%) 59670.45 79560.6 88797.75 118397 - - 3561.61 114835.39 45 934.156 6890 1.73 14% AR = 14% [49332.08 - 265201 (Acount , Recievable) - $3193.69 197. Inventory = 1443 14316 – 116887 =$ 367.92 total interest trunoreast can accounts receivable and unventory $(3193.69 +36 7.92) V=$ 3561.61 I trie, thom should utilize new cash discount policy