Garrick is purchasing equipment for his job as a builder. The equipment costs $1000 and he wants to make monthly payments of $125. He has two different credit cards that he can use to finance the purchase. • Card A charges 9.9%, compounded daily, but it also charges a fee of $65 for all purchases over $1000 that is immediately added to the balance. • Card B charges 13.3%, compounded daily. What is the total cost of both options? Enter the total cost of the cheaper option here:

Garrick is purchasing equipment for his job as a builder. The equipment costs $1000 and he wants to make monthly payments of $125. He has two different credit cards that he can use to finance the purchase. • Card A charges 9.9%, compounded daily, but it also charges a fee of $65 for all purchases over $1000 that is immediately added to the balance. • Card B charges 13.3%, compounded daily. What is the total cost of both options? Enter the total cost of the cheaper option here:

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter3: Income Sources

Section: Chapter Questions

Problem 79P

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Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.
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