The costs and benefits associated with the proposal to extend credit are calculated below: | |||
1] | Incremental contribution = (1200000-1000000)*(1-78%) = | $ 44,000 | |
2] | Incremental bad debts = -200000*5% = | $ -10,000 | |
3] | Days' sales outstanding [current] = 20*60%*40+30%+60*10% = | 30 | |
Investment in receivables [current] = 1000000*(30/365)*78% = | $ 64,110 | ||
Investment in receivables [proposed] = 1200000*(50/365)*78% = | $ 1,28,219 | ||
Increase in investment [128219-64110] | $ 64,110 | ||
Interest expense on additional investment = 64110*16% = | $ -10,258 | ||
Annual incremental before tax profit | $ 23,742 | ||
Tax at 21% | $ 4,986 | ||
Annual incremental after tax profit | $ 18,756 |
5. Geoffrey’s Toy Box currently has credit sales of $1,000,000. Sixty percent of customers pay on...
Q58: Geoffrey’s Toy Box currently has sales of $1,000,000, and its days sales outstanding is 30 days. The new CFO estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000. However, bad debt losses, which were 2% on the old sales, would increase to 5 percent on the incremental sales while bad debts on the old sales would stay at 2 percent. Variable costs are 80 percent of...
Solarius Trading Company is considering lengthening its credit period from 30 to 50 days. All customers will continue to pay on the net date. The firm currently has $300,000 of sales per year, but believes that as a result of the proposed change, sales will increase to $360,000. Bad debt expense will increase from 3% to 5% of sales. The variable cost is 70% of sales. The firm has a cost of capital of 12%. Assume a 360-day year. What...
Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren’s cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $240,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 2% of incremental sales (whether they actually end up collected or not), and production and selling costs are projected to be 78% of...
Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a per-unit sale price of $30.00. Bad debts currently are 5% of sales. The firm estimates that a proposed relaxation of credit standards would not affect its 70-day average collection period but would increase bad debts to 7.50% of sales. which would increase to 300,000 units per year. Forrester requires a 12% return...
Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a per-unit sale price of $30. Bad debts currently are 5% of sales. The firm estimates that a proposed relaxation of credit standards would not affect its 70-day average collection period but would increase bad debts to 7.5% of sales, which would increase to 300,000 units per year. Forrester requires a 12% return...
7-3 Corner Creations by Dana, Inc. has sales of $12.5 million a year and credit sales account for 80 percent of this amount (or $10.0 million). The vice president of mar- keting believes that sales could be increased very sharply if the company relaxes its credit policy. The company's average collection period is currently 36 days, its selling price per unit is $1,000, and its variable cost per unit is $800. The adoption of a new credit policy under consideration...
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $146,000 if credit is extended to these new customers. Of the new accounts receivable generated, 8 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 72 percent of sales. The firm is in the 10 percent tax bracket. a. Compute the incremental income after taxes. Incremental income after taxes...
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket. a. Compute the incremental income after taxes. Incremental income after taxes...
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket. a. Compute the incremental income after taxes. Incremental income...