Question

THE COMPANY:

GESTION S.A., is a company whose activity is the commercialization of articles
several, aimed at the flower sector. Your average sales revenue is in order
of $ 7,000,000 annually. Statistically, the gross profit margin obtained in
this type of business is 27%.
Credit sales correspond to a quarter of its total sales. The condition
current, for credit sales it is 1/10, n / 30. Of those who make purchases on credit,
who take advantage of the discount for prompt payment represent 60% of total sales
on credit. The average collection on credit sales is 40 days.
As cover for possible unpaid credits, the company allocates 2% of sales to
credit. In the company's budget, 3.5% of sales are allocated to credit to
collection expenses.

THE SITUATION:
They are meeting, reviewing the situation of the company, Carlos Espinoza, General Manager
and Fernando Tapia, Financial Manager, and despite the excellent results of the
They are committed to increasing income.
Fernando made an exhibition to Carlos, in which he concludes that you cannot
increase revenue by increasing gross profit margin, so suggest how
alternative increase sales.
Carlos requests Ricardo Jácome, Commercial Manager, that until the next day,
Prepare and present a project that meets the following expectations:
Increase total sales by 20%; considering that, of the total sales, the
70% are cash, and that 75% of credit sales take advantage of the discount for
I'll pay soon.

THE PROPOSAL:
After the deadline for presenting the result, the three meet again and
Ricardo proposes the following:
• That the credit condition is 2/10, n / 40.
• That the average collection period of days reaches 60 days.
• That 5% be assigned to collection expenses.
• Allocate 4% of annual sales for bad loans.
Carlos listened carefully and at the end, he directed his gaze to where he was
Fernando, waiting for your comments.

THE QUESTION:
What will be Fernando's comment, is it financially convenient for the company
accept the proposal to change their credit policies in this way, knowing that the market
pay up to 12% on bank investments?
Explain your calculations and support the reason for your comment as if you were
Fernando.

Answer 1

		Existing	Proposal
	Benefit
	Interest	816,986	958,290
	Cost
	Bad Debts	(140,000)	(336,000)
	Discount	(10,500)	(37,800)
	Net Benefit	666,486	584,490
	It is not financially convenient for the company to accept proposal as net benefit is lesser as compared existing situation
	Working
		Existing			Proposal
	Average sales Revenue	7,000,000			8,400,000	(7000000 X 1.2)
	Credit Sales	1,750,000	(7000000 /4)		2,520,000	(8400000 X 30%)
	Gross Margin	1,890,000	(7000000 X 27%)		2,268,000	(8400000 X 27%)
	Average Collection Period	40	days		60
	Sales who avial credit	1,050,000	(1750000 X 60%		1,890,000	(2520000 X 75%)
	Discount	10,500	(1050000 X 1%		37,800	(1890000 X 2%)
	Budgeted Discount	245,000			420,000
	Bad Debts	140,000	(7000000 X 2%)		336,000	(8400000 X 4%)
	Average Receivable	191,781			414,247
	By Re arranging Formula**
	Collection	6,808,219	(7000000-191781)		7,985,753	(8400000-414247)
	Interest	816,986	(6808219 X 12%)		958,290	(7985753 X 12%)
	**
	Average Collection Period=(Average Receivable/Credit Sales) X 365