Log in
Finance
2
answers
2
watching
2,033
views

Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2​% cash discount for payment within 15 days. The​ firm's current average collection period is 60 ​days, sales are 40,000 units, selling price is $45 per​ unit, and variable cost per unit is ​$36

The firm expects that the change in credit terms will result in an increase in sales to 42,000 ​units, that 70​% of the sales will take the​ discount, and that the average collection period will fall to 30 days. If the​ firm's required rate of return on​ equal-risk investments is 25% should the proposed discount be​ offered?  

​(Note​: Assume a​ 365-day year.)

Watch
2
answers
2
watching
2,033
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Avatar image
Read by 12 people

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share
Nestor Rutherford
Nestor RutherfordLv2
28 Sep 2019
Already have an account? Log in
Share

Related questions

Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed​ relaxation, sales are expected to increase by 10​% from 12,000 to 13,200 units during the coming​ year; the average collection period is expected to increase from 40 to 55 days; and bad debts are expected to increase from 1​% to 3​% of sales. The sale price per unit is $44​, and the variable cost per unit is $32.

The​ firm's required return on​ equal-risk investments is 24.5​%.

Evaluate the proposed​ relaxation, and make a recommendation to the firm.  

​(​Note: Assume a​ 365-day year.)

 Eagle Industries feels that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are ​$3,400,000 per​ year, billed on a continuous basis. The firm has other equally risky investments with a return of 11​%.

The cost of the lockbox system is ​$9,000 per year.  

​(Note​: Assume a​ 365-day year.)

a.  What amount of cash will be made available for other uses under the lockbox​ system?

b.  What net benefit​ (cost) will the firm realize if it adopts the lockbox​ system? Should it adopt the proposed lockbox​ system?

Chuck’s Beer Distributing is considering changing its credit policy from “net 45” to “2/20, net 45”. The firm expects its average collection period to decrease by 12 days, and 40% of its customers to take the cash discount. Chuck’s current credit sales of $40 million are not expected to change if the firm offers the cash discount. The firm’s bad-debt loss ratio is expected to remain at 4% if it adopts the credit terms. Chuck’s variable cost ratio is 70%, and it is able to invest at a rate of 16%. The firm does not expect its inventory level to change as a result of its proposed change in credit terms.

Compute the funds released by the change in credit terms.

Compute the net impact the change in credit terms has on Chuck’s pre-tax profits.

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in