Question

Maddox Resources has credit sales of $185,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay. (Use 365 days in a year.)

a-1. What is the average receivables balance? (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Accounts receivable balance           $

a-2. What is the receivables turnover? (Round the final answer to 2 decimal places.)

Receivables turnover             x

b. If Maddox offered a 3 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $185,000 for your calculation of receivables. (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

New receivable balance           $

c-1. If Maddox reduces its bank loans, which cost 15 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm? Use the full sales of $185,000 for your calculation of receivables. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to nearest whole dollar. Omit $ sign in your response.)

Net Change           $

c-2. Should Maddox Resources offer the discount?

• Yes

• No

d-1. Assume the new trade terms of 3/10, net 30 will increase sales by 24 percent because the discount makes Maddox price competitive. If Maddox earns 15 percent on sales before discounts, what will be the Net change in income? (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Net change in income           $

d-2. Should Maddox Resources offer the discount?

• Yes

• No

Answer 1

Answer:

   Maddox Resources

a.

Sales/365 days = average daily sales

$185,000/365 = $506.85

Accounts receivable balance = $506.85 × 30 days = $15205.50

OR

Turnover = sales/accounts receivable

$185000/15205.50 = 12.17

b.

$506.85 × 10 days = $5068.50 new receivable balance

c.

Old receivables – new receivables = Funds freed by discount

$15205.50 – $5068.50 = $ 10137

Savings on loan = 15% × $10137............... = $ 1520.55

Discount on sales = 3% × $185,000........... =   (5550)

Net change in income from discount......... $(4029.45)

No! Don't offer the discount since the income from the reduced bank loans, does not offset the loss on the discount.

d.

New sales = $185,000 × 1.24 = $229400

Change in sales = $229400 – $185,000 = $44400

Sales per day = $229400/365 = $628.50

Average receivables = $628.50 × 10 = $6285

Increase profit on new sales = 15% × $44400 = $6660

Discount cost = 3% × $229400 = (6882)

Interest savings ($15205.50 – $6285) × 15% = 1338.075

Net change in income $1116.075

Yes, offer the discount because total profit increases.