Question

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 $2.83 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 $2,705,000, 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. Assume that Vinson’s variable cost ratio is 68%, taxes are 40%, and the interest rate on funds invested in receivables is 17%. Perform the required analysis to answer the questions above. Assuming a 365-day year, calculate the net income under the current policy and the new policy.

Do not round intermediate calculations. Round your answers to the nearest dollar.

1)Current policy:

2) New policy:

3) Should the change in credit terms be made?

Answer 1

		Current Policy	New Policy
1]	Annual credit sales	$        28,30,000	$       27,05,000
	Variable costs [68%]	$        19,24,400	$       18,39,400
	Total contribution margin	$ 9,05,600	$ 8,65,600
2]	Receivables in days	95	35
	Receivables in $	$           7,36,575	$          2,59,384
	Investment in receivables at 68%	$           5,00,871	$          1,76,381
	Interest expense on investment in receivables at 17%	$              85,148	$             29,985
3]	Profit	$           8,20,452	$          8,35,615
	Tax at 40%	$           3,28,181	$          3,34,246
	Net income	$           4,92,271	$          5,01,369
4]	As the net income under the new policy would be
	more, the change in credit terms should be made.