Question

OB1 Sabres Ltd. has determined that product sales are not what they could be because they have unused capacity. As a result, the company is considering adjusting its marketing strategy. At present, all sales to distributors are on a cash basis, but the competition offers credit terms. Similar credit terms for OB1 Sabres have been suggested. Research suggests that sales in the upcoming year would jump from $4.375 million annually to $5.65 million with credit terms of 2/10, net 30. Furthermore, research estimates that 80 percent of the customers would take the discount and the remainder would pay on average on the 30th day. Inventory turnover would remain at 15 times a year. Cost of goods sold (variable costs) are 65 percent of gross sales. Bad debts are estimated to be 0.65 percent of credit sales. Credit department expenses would be $51,500 per year plus the salary of 3 individuals at $36,500 per year each. One of the staff would be reassigned from another division without affecting costs or productivity as that individual is currently redundant in that division. Marketing expenses are 5 percent of gross sales. Bank financing of working capital requirements is at 12 percent.

Required :

Can you please correct the incorrect asnwers ?

Δ Sales
Present policy	$ 4375000 4375000 Correct
New policy	5650000 5650000 Correct
	$ 1275000 1275000 Correct
Δ Contribution margin	35 35 Correct %	$ 446250 446250 Correct
Δ Discount expense
Present policy	$ 0 0 Correct
New policy	90400 90400 Correct
	$ 90400 90400 Correct	-90400 -90400 Correct
Δ Bad debt expense
Present policy	$ 0 0 Correct
New policy	36725 36725 Correct
	$ 36725 36725 Correct	-36725 -36725 Correct
Δ Marketing expense
Present policy	$ 218750 218750 Correct
New policy	282500 282500 Correct
	$ 63750 63750 Correct	-63750 -63750 Correct
Δ Administrative expense (related to credit       department)
Present policy	$ 0 0 Correct
New policy	$ 161000 161000 Correct
	$ 161000 161000 Correct	-161000 -161000 Correct
Δ Investment in accounts receivable
Present policy	$ 0 0 Correct
New policy
80% of the customers	123836 123836 Correct
20% of the customers	92877 92877 Correct
	$ 216713 216713 Incorrect
Δ Opportunity benefit on investment in A/R	12 12 Correct %	$ -26006 -26006 Incorrect
Δ Investment in inventory
Present policy	$ 189583 189583 Correct
New policy	244833 244833 Correct
	$ 434416 434416 Incorrect
Δ Opportunity benefit on inv. investment	12 12 Correct %	-52130 -52130 Incorrect
Total incremental change		$ 16239 16239 Incorrect

Answer 1

Δ Sales
Present policy	$ 4375000 Correct
New policy	5650000 Correct
	$ 1275000 Correct
Δ Contribution margin	35 35 Correct %	446250
Δ Discount expense
Present policy	$ 0 0 Correct
New policy	90400 Correct
	$ 90400 Correct	-90400
Δ Bad debt expense
Present policy	$ 0 0 Correct
New policy	36725 Correct
	$ 36725 Correct	-36725
Δ Marketing expense
Present policy	$ 218750 Correct
New policy	282500 Correct
	$ 63750 Correct	-63750
Δ Administrative expense (related to credit
department)
Present policy	$ 0 0 Correct
New policy	$ 161000 Correct
	$ 161000 Correct	-161000
Δ Investment in accounts receivable
Present policy	$ 0 0 Correct
New policy
80% of the customers	123836*65% = 80493
20% of the customers	92877 *65% = 60370
	$ 140863
Δ Opportunity benefit on investment in A/R	12 12 %	-16904
Δ Investment in inventory
Present policy	$ 189583 Correct
New policy	$244833 Correct
	$ 55250
Δ Opportunity benefit on inv. investment	12 12 %	-6630
Total incremental change		70841