Jupiter Ltd has annual credit sales of $80 million and 2 percent of the value of...

Jupiter Ltd has annual credit sales of $80 million and 2 percent of the value of these sales have to be written off as bad debt. Currently Jupiter’s credit terms are 4/15 net 30; and 50 percent of the non-defaulting credit customers take advantage of the discount. A further 40 percent of non-defaulters pay on time and the remaining 10 percent of non-defaulters pay 15 days late.

Jupiter Ltd is considering changing its credit terms to 2/10, net 30. It is expected that 25 percent of non-defaulting credit customers will take advantage of the changed discount, but that the percentage of non-defaulting customers paying on time without collecting the discount will rise to 55 while 20 percent will now pay 15 days late.

The change should increase credit sales to $90 million per year, but it is also expected to increase bad debts to 4 per cent of this total credit sales figure.

The existing administrative cost of pursuing slow payers is expected to increase from the existing $200,000 to $300,000. Jupiter’s opportunity cost of funds is 10 percent, its variable cost ratio is 70% and its average tax rate is 35 percent. Where appropriate, use a 360-day year.

Required:

(a) Calculate the days sales outstanding (DSO) for the old and new policies

(b) Calculate the discount expense for the old and new policies

(c) Calculate the cost of carrying accounts receivable for the old and new policies

(d) Calculate the bad debt losses for the old and new policies

(e) Calculate the percentage change in forecasted profit that shifting from the old to the new policy will bring about. (Please be accurate to these decimal places: xx.xx% or 0.xxxx)

Expert Solution

ekkarill92 answered 2 years ago

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