Question

Logan Distributing Company of Atlanta sells fans and heaters to retail outlets throughout the Southeast. Joe Logan, the president of the company, is thinking about changing the firm's credit policy to attract customers away from competitors. The present policy calls for a 1/10, net 30 cash discount. The new policy would call for a 3/10, net 50 cash discount. Currently, 30 percent of Logan customers are taking the discount, and it is anticipated that this number would go up to 50 percent with the new discount policy. It is further anticipated that annual sales would increase from a level of $393,500 to $605,000 as a result of the change in the cash discount policy.

The increased sales would also affect the inventory level. The average inventory carried by Logan is based on a determination of an EOQ. Assume sales of fans and heaters increase from 14,890 to 22,650 units. The ordering cost for each order is $198, and the carrying cost per unit is $1.55 (these values will not change with the discount). The average inventory is based on EOQ/2. Each unit in inventory has an average cost of $13.

Cost of goods sold is equal to 65 percent of net sales; general and administrative expenses are 15 percent of net sales; and interest payments of 14 percent will only be necessary for the increase in the accounts receivable and inventory balances. Taxes will be 40 percent of before-tax income.

For average collection period, assume the customer pays on the last day possible (if they are getting the discount, that is day 10; if not, that is day 30 with the original policy and day 50 with the proposed policy).

Part A
	Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (total sales minus cash discounts) to determine the average daily sales. Round your answer to the nearest whole dollar. What is the accounts receivable balance before the change? $26,153.33 $26,153.33 Correct What is the accounts receivable balance after the change?     $49666.50 $49666.50 Correct
Part B
	Determine the EOQ before and after the change in the cash discount policy. Translate this into average inventory (in units and dollars) before and after the change in the cash discount policy. Round your answer to the nearest whole unit. What was the EOQ prior to the change? 1950.42 1950.42 Correct What is the EOQ after the change?         2405.55 2405.55 Correct What was the average inventory prior to the change? 12677.73 12677.73 Incorrect What is the average inventory after the change?         15636.07 15636.07 Incorrect
Part C
	Determine the income after taxes before and after the new plan. Round your answer to the nearest whole dollar. This income statement cannot be filled in online; it is provided as a possible approach to solving this problem. Before Policy Change After Policy Change Net sales (Sales - Cash discount) Cost of goods sold (65%) Gross Profit Genreal and admin. expense (15%) Operating profit * Interest on increase in accounts receivable and inventory (14%) Income before taxes Taxes (40%) Income after taxes What was the income after taxes prior to the change? 47076 47076 Correct What was the income after taxes after to the change?       66521 66521 Incorrect
Part D
	True or false: the firm should use the new cash discount policy. PLEASE NOTICE THAT SOME OF THE PROBLEM IS SOLVED, WHILE SOME OF IT IS INCORRECT, THAMK YOU!

Answer 1

In PART C total new sales is 605000.

After the change in policy 50% people will make payment within 10 days and avail a discount of 3%. (3/10 net 30 means those who pay within 10 days get a discount of 3% and rest of to pay within 50 days)

So net sale amount that we receive is = (605000*.5*.97) + (605000*.5) = 595925

(since 50 % have availed discount we will recieve 100-3 = 97% of that amount. for balance 50% sales full amount will be received.)

Now COGS is 65% of net sales.

Net sales as calculated above is $595925. Hence, COGS = 595925*.65 = 387351.3

Gross profit = net sales - COGS = 595925-387351.3 = 208573.7

General and admin expense is 15% of net sales = 595925*.15 = 89388.75

Operating profit = Gross profit-general and admin expenses = 208573.7-89388.75 = 119184.95

Increase in inventory can be calculated from part B as = 1202.775-975.21 = 227.565

Increase in accounts receivable can be calculated from part A as = 49666.5-26153.33 = 23513.17

Total increase in inventory and accounts receivable = 227.565 + 23513.17 = 23740.735

Interest on this amount has to be charged @ 14% = 23740.735*.14 = 3323.703

Profit before tax = operating profit - interest on increase in inventory and accounts receivable = 119184.95 - 3323.703

= 115861.247

Profit before tax - tax @40% = 115861.247 - 46344.52 = 69516.78

Income after tax after changes = 69516.78