Question

Logan Distributing Company of Atlanta sells 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 $398,500 to $606,500 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 EOQ. Assume sales of fans and heaters increase from 14,930 to 22,400 units. The ordering cost for each order is $198, and the carrying cost per unit is $1.4 (these values will not change with the discount). The average inventory is based on EOQ/2. Each unit in inventory has an average cost of $11.

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 (if they are getting the discount, that is day 10; if 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 discounts) to determine the average daily 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?
Part B
	Determine the EOQ before and after the change in the cash discount policy. Translate this into average inventory (in units and dollars) before and after the change in the cash discount policy. Round your answer to the nearest whole unit. What was the EOQ prior to the change? What is the EOQ after the change?         What was the average inventory prior to the change? What is the average inventory after the change?
Part C
	Determine the income after taxes before and after the new plan. Round your answer to the nearest whole dollar. This income statement cannot be filled in online; it is provided as a possible approach to solving this problem. Before Policy Change After Policy Change Net sales (Sales - Cash discount) Cost of goods sold (65%) Gross Profit Genreal and admin. expense (15%) Operating profit * Interest on increase in accounts receivable and inventory (14%) Income before taxes Taxes (40%) Income after taxes What was the income after taxes prior to the change? What was the income after taxes after to the change?
Part D
	True or false: the firm should use the new cash discount policy. (Click to select)TrueFalse

Answer 1

D answer is true Yes the firm should use the new cash discount policy as it results in increase in profits by $21841.33 (69517.87-47676.54).  
LO900 distributing company call of accounts receivable :- Accounts receivable - Avg Colletion & Period No Before change in cash discount policy a) Avg collection period 307 x 10 = 3 107 x 30 = 21 24 days After change Po cash discount Polica a) Aug coletion period - 50% X10 - 5 50 X 50 = 2 30 da 6 Aug daily sales -398500 - (398500x 1% X 30%) 360 398500 - 1195.5 360 3973045 b) Aug daily sales = 606500 - (GOESDX31X8 360 = 606500 - 90975 360 597402.5 360 - $1103-62 - $ 1657.45 Id Accounts recevable е е хь - 24 x 1103.62 $26486.88 c) Accounts receivable ахь = 30 X 1659.45 = $49783.50

Income statement particulars Before After Change change en 1 Net sales (sales - cash disc) 397304.50 597402.50 2) cogs (65). of net sales) -(258247.93) (388311.63 3) gross profit 139056.57 209090-87 4) Gen of admin exp. " (1st of net sales) (59595.67) (89610037) s) operating profit 79460.90 11948015 5) Interest on increase in Alc's reuble (14%) # nil (3617.37) 7) Income before taxes 29460.90 115863.13 .) Tax @ 40% (31784.36 (46345.25) ) Income after taxes 47676.54 69517.87

2. calin of Eos For 280 o- ordering cost - $198. - carrying cost - $1.44 Beare change After change = 2x 14930 X 198 21 22400 X 198 = 1 5912280 SSTOOL 1.4 1.4 - 2055 units = 2517.14 units 3. cain of Average Inventory = LEO8/2 x Aug cost Before change After change = 2055 x u = 2517. 14 tu - 11302.5 units - 13844.27 Note :- 1 year = 360 days in above calculations ② # Interest on A in stock of All's Recubler = 14% of X/23296.62 $2541.77) Ain Al Din Inventory - rcuble = 14% X 25838:39 3617.37