Homework #3 - Accounts Receivable Bey Technologies is considering changing its credit terms from 2/ 15,...

Homework #3 - Accounts Receivable

Bey Technologies is considering changing its credit terms from 2/ 15, net 30 to 3/ 10, net 30 to speed collections. Currently, 40 percent of Bey’s paying customers take the 2 percent discount. Under the new terms, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore, bad debt losses are not expected to rise above their current 2 percent level. However, the more generous cash discount terms are expected to increase sales from $ 2 million to $ 2.6 million per year. Beys variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firms marginal tax rate is 40 percent. All costs associated with production and credit sales are paid on the day of the sale.

a. What is the days sales outstanding before and after the change?

b. Calculate the costs of the discounts taken before and after the change.

c. Calculate the bad debt losses before and after the change.

d. Calculate the financing costs before and after the change.

e. Now put your information above into an Income Statement. Compare the results. Should Bey change its credit terms? Explain.

Expert Solution

a]	DSO before change = 1540%+3060% =	24.0
	DSO after change = 1050%+3025%+40*25% =	22.5
b]	Cost of discounts before change = 200000040%2% =	$ 16,000
	Cost of discount after change = 260000050%3% =	$ 39,000
c]	Bad losses before change = 2000000*2% =	$ 40,000
	Bad losses after change = 2600000*2% =	$ 52,000
d]	Variable cost of receivables outstanding before change = 200000075%24/365 =	$ 98,630
	Variable cost of receivables outstanding after change = 260000075%22.5/365 =	$ 120,205
	Financing costs before change = 98630*9% =	$ 8,877
	Financing costs after change = 120205*9% =	$ 10,818
e]	Total contribution margin before change = 2000000*25% =	$ 500,000
	Total contribution margin after change = 2600000*25% =	$ 650,000
	INCOME STATEMENT
		Before Change	After Change
	Total contribution margin	$ 500,000	$ 650,000
	Discounts	$ (16,000)	$ (39,000)
	Bad debts	$ (40,000)	$ (52,000)
	Financing costs	$ (8,877)	$ (10,818)
	Net margin before tax	$ 435,123	$ 548,182
	Increase in net profit before tax		$ 113,058
	Tax at 40%		$ 45,223
	Increase in net profit after tax		$ 67,835
	As the net profit after tax is expected to increase after the change, Bey should change its
	credit terms.

jeff jeffy answered 2 years ago

Nike is considering changing its credit terms from “net 60” to “net 30” in its western...

Nike is considering changing its credit terms from “net 60” to “net 30” in its western Ohio sales territory. The company expects sales (all on credit) to decrease by 10% from a current level of 4 million, and it expects its average collection period to decrease from 70 days to 38 days. The bad-debt ratio should decline to 2.5% of sales from a current level of 5% of sales. The company also estimates that inventory investment would decrease by $100,000...

Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring...

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 62 days. Lewis estimates that tightening the credit terms would reduce annual sales to $355,000, but accounts receivable would drop to 38 days of sales. Lewis’ variable cost ratio is 65 percent and its average cost of funds is 12 percent. Should...

The accounts receivable turnover ratio of a company is 2; if its annual credit sales is...

The accounts receivable turnover ratio of a company is 2; if its annual credit sales is $ 951810, what is the average value of outstanding credit (or value of accounts receivable)? If the company operates 350 a year, what is the average number of days it takes to get a credit sale paid? Average outstanding credit = $ . (Round to TWO places of decimal) Average number of days to get payment on a credit sale = (Round to the nearest integer)

In credit terms of 3/15, n/45, the "3" represents the

QUESTION 37In credit terms of 3/15, n/45, the "3" represents thenumber of days in the discount periodfull amount of the invoicenumber of days when the entire amount is duepercent of the cash discount5 points QUESTION 38If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated asFOB shipping pointFOB destinationFOB n/30FOB seller5 points QUESTION 39Multiple-step income statements showgross profit but not income from operationsneither gross profit nor income from operationsboth gross profit and income...

Dyson is considering changing the credit term for its customers and also enforcing its credit policy...

Dyson is considering changing the credit term for its customers and also enforcing its credit policy more strongly. Dyson’s annual sales is $13 million and the current credit term is 3/30, net 45. Right now, 10% of the customer paid by cash, 20% of the customer paid in Day 30, 50% of the customer paid in Day 45 and still take the discount (which they shouldn’t), and 20% of the customer paid late in Day 55. Dyson wants to change...

2. The credit terms are; 3/15 with a net date of 45 days (show work): a....

2. The credit terms are; 3/15 with a net date of 45 days (show work): a. Calculate the interest savings associated with taking this discount: b. The Notes Payable or short-term borrowing rate is 5%. Should the discount be taken? c. Given your answer in part b, when should the purchasing company pay the bill?

A company with annual sales of $22,000,000 is considering changing its payment terms from net 40...

A company with annual sales of $22,000,000 is considering changing its payment terms from net 40 to net 30 to encourage customers to pay more promptly. The company forecasts that customers would respond by paying on day 32 rather than day 44 as at present (assume a 360 day year) but would decrease their purchases by $400,000 per year. The company also forecasts that its idle cash balance would decrease by $80,000 and administrative costs would be reduced by $30,000...

Natcher Corporation’s accounts receivable at the end of Year 2 was $148,000 and its accounts receivable...

Natcher Corporation’s accounts receivable at the end of Year 2 was $148,000 and its accounts receivable at the end of Year 1 was $156,000. The company’s inventory at the end of Year 2 was $151,000 and its inventory at the end of Year 1 was $143,000. Sales, all on account, amounted to $1,404,000 in Year 2. Cost of goods sold amounted to $822,000 in Year 2. The company’s operating cycle for Year 2 is closest to: (Round your intermediate calculations...

A firm has the following choices to finance its inventory purchase: •Credit terms of 2/15 net...

A firm has the following choices to finance its inventory purchase: •Credit terms of 2/15 net 45 EOM •A single payment note with $400,000 principal and an 8% annual interest rate payable in 45 days •A discount loan with $400,000 principal and 7.85% annual interest rate payable in 45 days 1.Explain what the credit terms mean. 2.Calculate the cost of not taking the discount. 3.Calculate the annualized cost of (a) the single payment note and (b) the discount loan. 4.Of...

Apr. 2 Purchased $3,000 of merchandise from Lyon Company with credit terms of 2/15, n/60, invoice...

Apr. 2 Purchased $3,000 of merchandise from Lyon Company with credit terms of 2/15, n/60, invoice dated April 2, and FOB shipping point. 3 Paid $380 cash for shipping charges on the April 2 purchase. 4 Returned to Lyon Company unacceptable merchandise that had an invoice price of $500. 17 Sent a check to Lyon Company for the April 2 purchase, net of the discount and the returned merchandise. 18 Purchased $5,300 of merchandise from Frist Corp. with credit terms...

Question