EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 18, Problem 6P
a)
Summary Introduction
To determine: The released funds due to variation in the credit terms.
b)
Summary Introduction
To determine: The additional cash discount cost.
c)
Summary Introduction
To determine: The net effect on profit.
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Power Inc. is considering shifting its credit terms from 3/15, n/30 to 4/10, n/30 in order to speed up collections. Currently, 30% of Power Inc.’s customers take the 3% discount, 35% pays on time; the rest on the 35th day. Under the new policy, 40% take the discount, half of the remaining customers pays on time while the rest pays 5 days after. More generous cash discount terms are expected to increase sales from P2,000,000 to P2,500,000 per year. Power Inc.’ variable cost ratio is 60%, the interest rate on funds invested in accounts receivable is 3%, and the firm’s income tax rate is 40%. Use 360 days/year.What is the Days Sales Outstanding before the change in credit policy?How much is the accounts receivable balance under the old credit policy?What is the incremental investment in accounts receivable? How much is the incremental sales? What is the incremental contribution margin?
Peanut Inc. is evaluating whether to change its credit terms from 2/10 net 30 to 3/10 net 30. At present, 50% of Peanut's sales are paid at day 10. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on day 30 whereas the remainder will pay 15 days late (no bad debts exist). But as a result of the higher cash discount offered with the new terms, sales are expected to increase from 757,000 to 801,000 per year. Peanut's variable cost ratio is 75% and its cost of funds is 8.7%. All production costs are paid on the day of the sale. Should the change be made?
Sway Tailors currently has credit terms of net 30, an average collection period of 29 days, and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30 that 45 percent of its customers would pay on Day 10 with the remainder paying on average in 32 days. How much cash could the company free up from its accounts receivables if it switched its credit policy?
Multiple Choice
O $65,009
O $38,762
$58,336
↓y
Chapter 18 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 18 - Prob. 1QTDCh. 18 - Prob. 2QTDCh. 18 - Prob. 3QTDCh. 18 - Prob. 4QTDCh. 18 - Prob. 5QTDCh. 18 - Prob. 6QTDCh. 18 - Prob. 7QTDCh. 18 - Prob. 8QTDCh. 18 - Prob. 9QTDCh. 18 - Prob. 10QTD
Ch. 18 - Prob. 11QTDCh. 18 - Prob. 12QTDCh. 18 - Prob. 13QTDCh. 18 - Prob. 14QTDCh. 18 - Prob. 15QTDCh. 18 - Prob. 16QTDCh. 18 - Prob. 17QTDCh. 18 - Prob. 18QTDCh. 18 - Prob. 19QTDCh. 18 - Prob. 20QTDCh. 18 - Prob. 21QTDCh. 18 - Prob. 22QTDCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21P
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