ABC Distributing Company sells small appliances to hardware stores. The President of the Company thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/10, net 30, and the new policy would call for a 3/10, net 50. Currently 40% of the customers are taking the discount, and it is anticipated that this number would go up to 50% with the new discount policy. It is further anticipated that annual sales would increase from a level of $200,000 to $250,000 because of the change in the cash discount policy. The increased sales would also affect the inventory level. The average inventory carried by Company is based on a determination of an EOQ. Assume unit sales of small appliances will increase from 20,000 to 25,000 unit. The ordering cost for each is $100 and the carrying cost is based on EOQ/2. Each unit in inventory has an average cost of $6.50. CoGS is equal to 65% of net sales; general and adm. expenses are 10% of net sales; and interest payments of 12% will be necessary only for the increase in the accounts receivables and inventory balances. Taes will equal 25% of before-tax income. Compute the accounts receivables balance before and after the change in the cash discount policy. Use the net sales (Total Sales-Cash discount) to determine the average daily sales and the accounts receivables balances. Determine 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.Should the new cash discount policy be utilized? Briefly comment Calculate the income after taxes before and after the change in the cash discount policy.
ABC Distributing Company sells small appliances to hardware stores. The President of the Company thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/10, net 30, and the new policy would call for a 3/10, net 50. Currently 40% of the customers are taking the discount, and it is anticipated that this number would go up to 50% with the
new discount policy. It is further anticipated that annual sales would increase from a level of $200,000 to $250,000 because of the change in the cash discount policy.
The increased sales would also affect the inventory level. The average inventory carried by Company is based on a determination of an EOQ. Assume unit sales of small appliances will increase from 20,000 to 25,000 unit. The ordering cost for each is $100 and the carrying cost is based on EOQ/2. Each unit in inventory has an average cost of $6.50.
CoGS is equal to 65% of net sales; general and adm. expenses are 10% of net sales; and interest payments of 12% will be necessary only for the increase in the accounts receivables and inventory balances. Taes will equal 25% of before-tax income.
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Compute the accounts receivables balance before and after the change in the cash discount policy. Use the net sales (Total Sales-Cash discount) to determine the average daily sales and the accounts receivables balances.
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Determine 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.Should the new cash discount policy be utilized? Briefly comment
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Calculate the income after taxes before and after the change in the cash discount policy.
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