Question

BUSI 320 Comprehensive Problem 2 2019 Summer

You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit.

Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days.

1. If the company currently averages $40,000 in collections per day, how many dollars will this suggested cash management system free up?

2. If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?

3. Do the numbers suggest that this new system should be implemented if its total annual cost is $5200? Explain.

Answer 1

1)Current average collection per day is $40,000

Reduction in collection Days = 2

Thus in the first option the suggested cash management system would free up the average collection per day times the number of days = $40,000 X 2 = $80,000

2) The free up collection would be used to pay a debt which has an interest rate of 6%,

Then the amount of money that could be saved each year in interest expense =40,000 X 2(days) X 365(total days in a year) X (0.06/365)= $4800

3) Our total cost savings is $4800 which is lower than the annual cost of $5200 hence we should not implement this system and the cost would outweigh the benefits