The Boyd Corporation has annual credit sales of $1.73 million. Current expenses for the collection department...

The Boyd Corporation has annual credit sales of $1.73 million. Current expenses for the collection department are $43,000, bad-debt losses are 1.8%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $27,000 per year. The change is expected to increase bad-debt losses to 2.8% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,755,000 per year. Suppose that the opportunity cost of funds is 16%, the variable cost ratio is 63%, and taxes are 40%. Assuming a 365-day year, calculate the cost of carrying receivables under the current policy and the new policy. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Current policy: $

New policy: $

Expert Solution

Based upon the given information provided in question

Formulae for calculating Cost of carrying receivables

Cost of carrying receivables = Days of sales outstanding (DSO) * Sales per day * Variable Cost ratio * Cost of Funds

The following would the calculation

Particulars	Current Policy	New Policy
Days of sales outstanding (DSO) (a)	30 Days	45 Days
Sales per day = Total Sales/ 365 (b)	$ 4,739.73	$ 4,808.22
Variable cost ratio (c)	63%	63%
Cost of funds (d)	16%	16%

Cost of carrying receivables (e) = (a) * (b) * (c) * (d)	$ 14,333	$21,810

Calculation of profitability in both the policies:

Particulars	Current Policy	New Policy
Sales (a)	$ 1,730,000	$ 1,755,000
Less: Variable Cost *(b) = 63% (a)**	$ 1,089,900	$ 1,105,650
Profit before credit cost and taxes (c ) = (a) - (b)	$ 640,100	$ 649,350
Less: Collection Expenses (d)	$ 43,000	$ 27,000
Less: Bad Debts (e) current policy *(e) = 1.80% (a) new policy (e) = 2.8% * (a)**	$ 31,140	$ 49,140
Less: Cost of carrying receivables (f)	$ 14,333	$ 21,810
Income Before Tax (g) = (c ) - (d) - (e ) - (f)	$ 551,627	$ 551,400
Less: Taxes @ 40% (h) = 40% of (g)	$ 220,651	$ 220,560
Income After Tax (i) = (g) - (h)	$ 330,976	$ 330,840

Trust the same will serve your purpose.

Should you need any clarifications, please feel free to comment.

jeff jeffy answered 1 year ago

The Boyd Corporation has annual credit sales of $2.57 million. Current expenses for the collection department...

The Boyd Corporation has annual credit sales of $2.57 million. Current expenses for the collection department are $44,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $26,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,595,000 per year....

The Boyd Corporation has annual credit sales of $1.95 million. Current expenses for the collection department...

The Boyd Corporation has annual credit sales of $1.95 million. Current expenses for the collection department are $31,000, bad-debt losses are 1.7%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $25,000 per year. The change is expected to increase bad-debt losses to 2.7% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,975,000 per year....

The Dream Corp has annual credit sales of $2.5 million. Current expenses for the collection department...

The Dream Corp has annual credit sales of $2.5 million. Current expenses for the collection department are $40,000, bad-debt losses are 1.00%, and the days sales outstanding is 25 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $28,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 61 days. In addition, sales are expected to increase to $2.8 million per...

Stevens Company presents the following information: Current annual credit sales : $24,000,000 Collection period : 3...

Stevens Company presents the following information: Current annual credit sales : $24,000,000 Collection period : 3 months Terms : net/30 Rate of return : 18% The company is considering offering a 4/10, net/30 discount. It anticipates that 30 percent of its customers will take advantage of the discount. The collection period is expected to decrease to 2 months. How much is the net advantage/disadvantage of the planned discount policy? Should the discount policy be implemented?

Company X has credit sales of $189,000 Annual credit terms of net 30 days, Collection period...

Company X has credit sales of $189,000 Annual credit terms of net 30 days, Collection period is 30 days. 3/10 discount worth it? Cash generated used for bank loans of 12% 3/10 discount causes 23% increase in sales Profit of 15% what is the change in annual income? Take offer?

Tara's textiles currently has credit sales of 360 million per year and a collection period of...

Tara's textiles currently has credit sales of 360 million per year and a collection period of 60 days. Assume that the price of Tara's products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable charge that will result in a 20% increase in sales and a 20% increase in the average collection period. No changes in bad debt is expected. The firm's equal risk opportunity cost on its investment...

Aurora Corporation has annual credit sales of $1,200,000 with credit terms of 45 days and an...

Aurora Corporation has annual credit sales of $1,200,000 with credit terms of 45 days and an average collection period of 40 days with no discount. In the current economy Aurora has fallen upon tough times and is looking for ways improve cash flow, so the company is considering a changing their collection policy to 1/10 net 30. They estimate 50% of customers will take advantage of the discount and the average collection period will be 28 days. With the change...

Jupiter Ltd has annual credit sales of $80 million and 2 percent of the value of...

Jupiter Ltd has annual credit sales of $80 million and 2 percent of the value of these sales have to be written off as bad debt. Currently Jupiter’s credit terms are 4/15 net 30; and 50 percent of the non-defaulting credit customers take advantage of the discount. A further 40 percent of non-defaulters pay on time and the remaining 10 percent of non-defaulters pay 15 days late. Jupiter Ltd is considering changing its credit terms to 2/10, net 30. It...

A new project is expected to generate annual sales of $74 million, annual expenses of $42...

A new project is expected to generate annual sales of $74 million, annual expenses of $42 million, and an annual depreciation expense of $10 million. The firm's tax rate is 35%. Calculate the OCF (Operating Cash flow) for the year by using any of the three methods discussed in the chapter 9

Raphael Ltd. is a small engineering business that has annual credit sales revenue of $2.4 million....

Raphael Ltd. is a small engineering business that has annual credit sales revenue of $2.4 million. In recent years, the business has experienced credit control problems. The average collection period for sales has risen to 50 days even though the stated policy of the business is for payment to be made within 30 days. In addition, 1.5% of sales are written off as bad debts each year. The accounts receivable are currently financed through a bank overdraft, which has an...

Question