he Blue Company has under study a new credit policy that they believe will increase annual sales from P11 million to P14 million. However, the new plan is also expected to increase bad debt losses from P800,000 to P1.2 million each year. The average collection period on collectible sales is now averaging 90 days. This ratio will increase to 120 days for both old and new slaes if the new credit policy is adopted. The increase in sales is expected to increase the company's investment in inventory by P20,000. Assuming a pre-tax reuired rate of return of 25% and a variable cost-to-sales ration of 60%, should the Blue Company adopt the new credit policy? Assume a 360-day year.

he Blue Company has under study a new credit policy that they believe will increase annual sales from P11 million to P14 million. However, the new plan is also expected to increase bad debt losses from P800,000 to P1.2 million each year. The average collection period on collectible sales is now averaging 90 days. This ratio will increase to 120 days for both old and new slaes if the new credit policy is adopted. The increase in sales is expected to increase the company's investment in inventory by P20,000. Assuming a pre-tax reuired rate of return of 25% and a variable cost-to-sales ration of 60%, should the Blue Company adopt the new credit policy? Assume a 360-day year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 7P

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Jungga Inc is considering relaxing its credit standards to increase its sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 20,000units during the coming year; the average collection period is expected to increase from 35 to 50 days; and bad debts are expected to increase from 2% to 3% of sales. The sale price per unit is ₱30, and the variable cost per unit is ₱21. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation and make a recommendation to the firm whether the proposed relaxation would benefit the firm.
Jungga Inc is considering relaxing its credit standards to increase its sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 20,000units during the coming year; the average collection period is expected to increase from 35 to 50 days; and bad debts are expected to increase from 2% to 3% of sales. The sale price per unit is ₱30, and the variable cost per unit is ₱21. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation and make a recommendation to the firm whether the proposed relaxation would benefit the firm. Follow the format attached. Do it in table. Make it clear and easy to understand.
To increase sales, management is considering reducing its credit standards. This action is expected to increase sales by $120,000. Unfortunately, it is anticipated that 7 percent of the sales will be uncollectible. Accounts receivable turnover is expected to be seven times a year, and it costs the firm 11 percent to carry its receivables. Collection costs will be 4 percent of sales, and the cost of the additional goods sold is $62,000. Will earnings increase? Round your answer to the nearest dollar. Net in earnings is $ .
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Kelly expects its sales to be $20 million this year under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 65 days; and the bad debt loss percentage is 4%. Also, Kelly’s cost of capital is 14%, and its variable costs total 62% of sales. Since Kelly wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. It is predicted that sales would increase by $600,000, and that 55 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 2 percent. (Hint, use incremental approach table) What would be the incremental bad debt losses if the change were made? What would be the incremental cost of carrying receivables if the change were made? What are the incremental pre-tax profits from this proposal?
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