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Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit.
Vinson’s variable cost ratio is 85%, and taxes are 40%. If the interest rate on funds invested in receivables is 18%, should the change in credit terms be made?
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Intermediate Financial Management
- ALei Industries has credit sales of $146 million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 35 days. a. What is the maximum level of accounts receivable that ALei can carry and have a 35-day average collection period? b. If ALei's current accounts receivable collection period is 55 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 35 days?arrow_forwardBrown Corporation had average days of sales outstanding of 19 days in the most recent fi scal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fi scal year to match the industry average of 15 days. Credit sales in the most recent fi scal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fi scal year. To achieve Brown’s goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to: C . –$1.22 million.arrow_forwardIngraham Inc. currently has $525,000 in accounts receivable, and its days sales outstanding (DSO) is 67 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest dollar. $arrow_forward
- Axis Wells and Excavation (AWE) currently generates $110,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $104,000, and accounts receivable will average $13,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSO Existing: days DSO New: daysarrow_forwardRuth Company currently has $1,000,000 in accounts receivable. Its average collection period is is 50 days. Assume a 365-day year. The company wants to reduce its average collection period to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSo to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change? this is a bonus question Select one: a. $900,000 b. $676,667 c. $776,000 d. $576,000 e. $976,667 IIIarrow_forwardJ Ltd. makes credit sales of $424,000 yearly The credit term offered by J Ltd. equals the average collection period ie, net 45 days. The company plans to adopt new credit terms. The new credit terms are 2/18. net 45. It is assumed that all the customers pay on the last day of the discount period. The company plans to use the amount of decrease in accounts receivable to reduce the bank loan that costs 10% Question 16 Assume that the new credit terms would increase the sales to 110% and the company earns 20% on sales before any discounts, determine the amount of net change in income if the company decides to adopt the new credit terms. (Use a 360-day year for calculations. Don't round intermediate calculations. Round the final answer to the nearest whole dollar) $8,400 $2.968 12 13 $2.120 $3.816arrow_forward
- Please help me with this question thankuuuuu pleasearrow_forwardeBook Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $360,000, and the average collection period (DSO) is 60 days. Lewis estimates tightening the credit terms will reduce annual sales to $356,000, but accounts receivable would drop to 35 days of sales. Lewis' variable cost ratio is 60 percent and its average cost of funds is 9 percent. Should the change in credit terms be made? Assume all operating costs are paid at the time inventory is sold and all sales are collected at the DSO. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to the nearest cent. The NPV for the existing credit policy, that is $ , is the NPV for the proposed credit policy, that is $ . Thus, Lewis Lumber change its credit policy.arrow_forwardLewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 12,000 to 13,200 units during the coming year; the average collection period is expected to increase from 50 to 70 days; and bad debts are expected to increase from 1% to 2.5% of sales. The sale price per unit is $41, and the variable cost per unit is $29. The firm's required return on equal-risk investments is 9%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.) The additional profit contrbution from an increase in sales is $ ? (round to the nearest dollar) The cost from the increased marginal investment in A/R is $ ? (round to the nearest dollar)arrow_forward
- Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 5% from 10,000 to 10,500 units during the coming year; the average collection period is expected to increase from 40 to 55 days; and bad debts are expected to increase from 2% to 4% of sales. The sale price per unit is $39, and the variable cost per unit is $29. The firm's required return on equal-risk investments is 9.4%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note:Assume a 365-day year.) a. the cost from the increased marginal investment in A/R is? (round to nearest dollar) b. the cost from an increase in bad debts.? (round to nearest dollar) c. compute the net profit from the proposed plan.arrow_forwardRose Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short- term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are P11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? P32,964 P36,526 P40,370 P34,699 P38.448arrow_forwardLewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 13,000 to 14,300 units during the coming year; the average collection period is expected to increase from 45 to 65 days; and bad debts are expected to increase from 11% to 33% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm's required return on equal-risk investments is 25.3%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.) The additional profit contribution from an increase in sales is?arrow_forward
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