Reliant Umbrellas has been approached by Plumpton Variety Stores of Nevada. Plumpton has expressed interest in an initial purchase of 5,000 umbrellas at $10 each on Reliant?s standard terms of 2/30, net 60. Plumpton estimates that if the umbrellas prove popular with customers, its purchases could be in the region of 30,000 umbrellas a year. After deductions for variable costs, this account would add $47,000 per year to Reliant?s profits. Reliant has been anxious for some time to break into the lucrative Nevada market, but its credit manager has some doubts about Plumpton. In the past five years, Plumpton had embarked on an aggressive program of store openings. In 2001, however, it went into reverse. The recession, combined with aggressive price competition, caused a cash shortage. Plumpton laid off employees, closed one store, and deferred store openings. The company?s Dun and Bradstreet rating is only fair, and a check with Plumpton?s other suppliers reveals that, although Plumpton traditionally took cash discounts, it has recently been paying 30 days slow. A check through Reliant?s bank indicates that Plumpton has unused credit lines of $350,000 but has entered into discussions with the banks for a renewal of a $1,500,000 term loan due at the end of the year. Table 32.1 summarizes Plumpton?s latest financial statements.

As credit manager of Reliant, how do you feel about extending credit to Plumpton?

2001 2000 2001 2000 $ 1.0 $ 1.2 1.6 $ 2.3 $ 2.5 Cash Receivables Payables Short-term loans Long-term debt Equity Total liabilities 1.5 3.9 1.9 10.9 11.6 4.3 $18.7 Inventory Fixed assets Total assets 1.8 2.6 5.1 10.5 11.7 $18.5 $18.5 $18.7 2001 2000 Sales Cost of goods sold Selling, general, and administrative expenses Interest Tax $5.0 $59.0 35.9 20.2 32.6 20.8 .5 .3 1.3 $ 1.3 .5 $ .6 Net income