Question

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 $1.91 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 $1,785,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Assume that Vinson’s variable cost ratio is 64%, taxes are 40%, and the interest rate on funds invested in receivables is 21%.

Assuming a 365-day year, calculate the net income under the current policy and the new policy. Do not round intermediate calculations. Round your answers to the nearest dollar.

Current policy: $ __________

New policy: $ ___________

Answer 1

Particulators	Current Policy	New Policy
Sales	$1,910,000	$1,785,000
Variable Cost (Ratio 64%)	$ 1,222,400.00	$ 1,142,400.00
Interest on fund invested(WORKING NOTE)	$      104,395.89	$        35,944.52
Profit	$      583,204.11	$      606,655.48
Less : Tax @40%	$      233,281.64	$      242,662.19
Net Profit	$349,922	$363,993
The firm should change the credit terms
Interest on fund invested
Sales	$1,910,000	$1,785,000
number of days for accounts receivable	95	35
Receivables(sales* no of days/365)	$      497,123.29	$      171,164.38
interest on accounts recivables(21%)	$      104,395.89	$        35,944.52