Question

Dyson is considering changing the credit term for its customers and also enforcing its credit policy more strongly. Dyson’s annual sales is $13 million and the current credit term is 3/30, net 45. Right now, 10% of the customer paid by cash, 20% of the customer paid in Day 30, 50% of the customer paid in Day 45 and still take the discount (which they shouldn’t), and 20% of the customer paid late in Day 55. Dyson wants to change the credit term to 5/10, net 30. It believes the stricter enforcement of the credit policy will result in a 2% decline in annual sales. Under the new policy, 10% of the customer will still pay by cash, 60% of the customer will pay in Day 10, and 30% of the customer will pay in Day 30 and Dyson will ensure these customers don’t get the discount. As a result of trying to enforce the new policy, Dyson expects to incur extra legal expense of $50,000 to warn customers who don’t comply with the new policy. Bad debt is currently sitting at 3% of credit sales and Dyson estimates that bad debt would reduce to 1% of credit sales under the new policy. Dyson’s profit margin is 35% and it has a line of credit with the bank charging an interest rate of 9%. Should Dyson change its credit policy?

You must show all calculation steps, providing a final answer only will not get you full marks.

Answer 1

Annual Sale is		13000000
Credit terms		3 /30 net 45
	Payment Mode
10% of Customer	Cash		1300000	Assuming Not availing Credit
20% of Customer	30 Day		2600000	Discount Availed	78000
50% of the Customer	45 Day		6500000	Discount Availed	195000
20% of the Customer	55 Day		2600000	No Discount Availed
Bad Debt	3%				390000
Profit Margin 35%
Profit on Sale Reported			4550000
Less: Discount Paid				273000
Less: Bad Debt Expenses			390000
Less: Interest Expenses			108875
Net Earning s				3778125
Calculation for Line of Credit
6500000	for 45 Days			73125
2600000	for 55 Days			35750
New Credit Policy with 30 Day and 10 % discont on Payment within 5 Days
Annual Sale is		12740000
Credit terms		5 / 10 Net 30
10% of Customer	Cash		1274000	Assuming Not availing Credit
60% of Customer	10 Day		7644000	Discount Availed	382200
30 % of the Customer	30 Day		3822000	No Discount Availed
Legal Expenses				50000
Bad Debt	1%				12740
Profit Margin 35%
Profit on Sale Reported			4459000
Less: Discount Paid				382200
Less: Bad Debt Expenses			12740
Less: Legal Expenses				50000
Less: Interest Expenses			28272
Net Earnings				3985788
Calculation for Line of Credit
3822000	for 30 Days			28272
Hence It is advisable to bring the new policy in place