Question

Candida’s Cash and Carry (CCC)store had been the major shoe retailer in a bustling country town for many years. One morning Candida was standing at the doorway of her shop and saw a stranger ride into town in a very conspicuous hammer vehicle. Later that day she heard that the stranger had made an offer for a vacant building down the street from her store. It was said that Yozefu fransi, its 82-year-old owner, who had long given up hope of selling the property, immediately accepted the offer. The next morning the town was abuzz with rumors. The stranger, whilst having a good time the previous evening at the Yenu Pub, a popular local watering hole, let slip that he was going to crush Candida and the other businesses in town by opening a modern shop, Hammer Emporium which will not only offer a complete range of goods but also it will offer credit to the customers. The town residence had only ever bought their goods for cash and they began to wonder how they would keep control of expense in future. Candida smelt trouble. She currently sold 19,500 pairs of shoes per year. The shoes, which cost her on average Tshs 10,000 a pair, were sold at an average price of Tshs 15,000 per pair. She always knew that if she was prepared to give credit, her sales volume could have been as high as 30,000 pairs a year. with this in mind she tried to calculate whether it would be worth her while to offer credit as a competitive weapon against the stranger, knowing that her costs would rise to Tshs 12,000 per pair if she had to set up a complex system of credit control. would she suffer any bad debts? What level of bad debts could she afford? Should she raise her selling price to cover the extra costs she will incur? Also, in the same town the major local farm implements store was doing Tshs 350 million a year in sales. Farmers had always relied on credit and they paid on average in 60 days. This had long been a source of worry for its owner, Moshingo kazijembe. he started to wonder whether he should use cash discounts to compete with the stranger and improve his collection period. he thought that a new credit policy of 5/10 net 30 would be attractive enough, and he believed that about half of his customers would pay fast enough to qualify for the discount and that he could then average 30 days in his receivables. The next evening, the chairman of the local branch of the chamber of commerce called an urgent meeting at the local football club pub. As a special favour, although she was not a member, Candida was invited. She joined Moshingo, the chairman and a few other prominent businessmen in the town in an earnest discussion about their predicament. after an hour of arguing they finally agreed that none of them knew how to analyze the changes in the receivables policies that they had been thinking about, and so they called for a Chairman’s son, who had just graduated at the University of Dar es Salaam with a master’s degree in finance and accounting Required: What analysis do you think the son did and what advice should he have given to the two storekeepers? Base your analysis on a cost of finance of 12 percent per year

Answer 1

		ANALYSIS OF SHOE BUSINESS OF CANDIDA
	A	Average selling price	15,000
	B	Average cost	10,000
	C=A-B	Contribution per unit	5,000
	D	Current sales quantity	19,500
	E=C*D	Current contribution margin	97,500,000
	F	Sales quantity with credit offering	30,000
	G	Cost per unit with credit offering	12,000
	H=A-G	Contribution per unit with credit offering	3,000
	I=H*F	Contribution margin with credit offering	90,000,000
		Loss of contribution margin	(7,500,000)	Tshs
		There will be additional cost of finance
		If she gives credit for one month:
	J	Finance required	30,000,000	(12000*30000)/12
	K=J*0.12	Finance cost(One months interest)	(3,600,000)	Tshs
		Recommendation:
		It will not be advisable for Candida to offer credit
		ANALYSIS OF FARM IMPLEMNTS STORES
	A	Annual Sales	350,000,000
		Current average collection period	60	days
		Average collection period with new credit policy	30	days
	B	Saving in collection period	30	days
	C=A*(B/365)	Reduction in working capital	28,767,123	(350000000*(30/365)
	D=C*0.12	Saving in finance cost	3,452,055
	E=(A/2)*0.05	Additional Cost for discount	(8,750,000)	(350000000/2)*0.05
	F=D+R	Net savings/(Loss) with new credit policy	(5,297,945)
		Recommendation:
		It will not be advisable to implement new credit policy