Maggie's Gold Coins, Inc is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days
Bad debt expenses are also expected to decrease from 1.2 percent to 0.8 percent of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are $300,000. The firm has a required return on similar-risk investments of 15 percent. Evaluate this proposed change and make a recommendation to the firm.
300,000 - 275,000 = 25,000 units decline in sales
Price = P = $4,200,000/300,000 = $14
Variable cost per unit = v = $3,300,000/300,000 = $11
Reduction in profit contribution from decline in sales
= (300,000 - 275,000 units) × ($14 - $11 ) = $75,000
Cost of marginal investment in A/R:
Turnover of A/R with proposed plan = 360/30 = 12
Average investment with proposed plan = = $252,083
Turnover of A/R with present plan = 360/36 = 10
Average investment with present plan = = $330,000
Reduced investment in A/R = $ 77,917
Reduction in cost of marginal investment in A/R = 77,917 × (0.15 ) = $11,688
Reduction in marginal bad debts:
Bad debts with present plan = (0.012 ) ×($4,200,000 ) = $50,400
Bad debts with proposed plan = (0.008 ) × ($275,000 ) × (14 ) = $30,800
Reduction in bad debts = $19,600
Net loss from implementing proposed plan = -$75,000 + $11,688 + $19,600 = -$43,712
This proposal is not recommended.
You might also like to view...
Which of the following statements is true regarding a sales organization?
A) A national sales manager usually heads the sales organization. B) The largest part of the organization is made up of the regional sales managers. C) Sales organizations are usually a part of marketing. D) The different titles in a sales organization are as per the size of the geographic territory covered.
The relationship between the normal point and the crash point is assumed to be
A. Curvilinear. B. Linear. C. Variable. D. Conversely related. E. Exponentially related.
When a buying division elects to purchase from an outside supplier,
A) the impact on overall company profits is usually not considered in the decision. B) only fixed costs should be included in the decision analysis. C) the price from the outside supplier is likely to be more than the incremental cost to the supplying division. D) overall company profits should be enhanced.
On January 21, 2016, Bessant, Inc. received merchandise from Mullies, Inc. On that date, it found a few of these goods to be damaged. On January 22, it returned the damaged goods to the seller. Such returns will be treated as ________ by Bessant
A) purchase returns B) sales returns C) purchase allowances D) sales allowances