Question

In: Finance

A customer applies for credit at your firm. Your terms are net 35 days. The customer’s...

A customer applies for credit at your firm. Your terms are net 35 days. The customer’s D&B report reveals that he pays on the net date only 10% of the time. He pays 30 days late 60% of the time, he pays 60 days late 20% of the time, and he pays 90 days late 10% of the time (with necessary assistance being provided by a collection agency).

The item he wishes to buy has an invoice price of $2,000 and your variable cost is $1,850. Your credit administration/collection costs are $40 per month, beginning when an invoice has passed its net date. After referral to the collection agency, the collection agency keeps 30% of all funds collected as its fee.

Your annual cost of capital is 11%. Should you grant credit to this applicant?

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A firm offers credit terms of 3/10, net 35. What is the effective annual rate on...
A firm offers credit terms of 3/10, net 35. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $10,000 purchase? Assume that there are 365 days in one year. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)
your organisation has been offered credit terms of 1/10 net 35. what is the approximately effective...
your organisation has been offered credit terms of 1/10 net 35. what is the approximately effective annual rate of return earned if the discount offered is taken?
Maddox Resources has credit sales of $196,000 yearly with credit terms of net 30 days, which...
Maddox Resources has credit sales of $196,000 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           $ 16109.59 a-2. What is the receivables turnover? (Round...
Maddox Resources has credit sales of $185,000 yearly with credit terms of net 30 days, which...
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...
Maddox Resources has credit sales of $193,000 yearly with credit terms of net 30 days, which...
Maddox Resources has credit sales of $193,000 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...
Maddox Resources has credit sales of $193,000 yearly with credit terms of net 30 days, which...
Maddox Resources has credit sales of $193,000 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...
Dome Metals has credit sales of $180,000 yearly with credit terms of net 60 days, which...
Dome Metals has credit sales of $180,000 yearly with credit terms of net 60 days, which is also the average collection period.      a. Assume the firm offers a 3 percent discount for payment in 18 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 12 percent. What will the net gain or loss be to the firm if this discount...
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
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 $2.63 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 $2,505,000, but accounts receivable would drop to 35 days of sales and...
  A firm is contemplating shortening its credit period from 45 to 35 days and believes​ that,...
  A firm is contemplating shortening its credit period from 45 to 35 days and believes​ that, as a result of this​ change, its average collection period will decline from 51 to 43 days. ​ Bad-debt expenses are expected to decrease from 1.6 % to 1.1 % of sales. The firm is currently selling 11,900 units but believes that as a result of the proposed​ change, sales will decline to 9,900 units. The sale price per unit is $ 55 ​,...
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?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT