Alabama Company makes and sells electric fans. Its manufacturing factory in Mainland China utilizes around 90% of its production capacity. Its Hong Kong selling office distributes the electric fans only to local wholesalers. Traditionally, the company’s sales have been in the following categories: 25% cash sales; and around 75% sales on account (due in 60 days). Uncollectible accounts expense was approximately 1% of net sales. With these policies, Alabama earned a modest profit, and monthly cash receipts exceeded monthly cash payments by a comfortable margin. In the recent management meeting, the Sales Manager proposes a new credit policy, i.e. Alabama will offer 360-day payment terms to all customers. The Sales Manager expects that both the sales and profit will be doubled (so called “Double Excellence”). Although the new proposal may improve the profit level, the Financial Controller raises the concerns of cash flow problem. Alabama will take a longer time to convert its investment in accounts receivable into cash by granting longer credit terms to all customers.

1) Suggest TWO ways that Alabama may be able to generate the cash it needs to pay its bills when the “Double Excellence” is implemented. What are the expected financial impacts if Alabama adopts your suggestion?

2) Suggest TWO factors (besides cashflow issue) to Alabama’s management for the evaluation of the plan. Explain.

Answer rating: 100% (QA)

1 They could AOffer discounts to pay early eg 2 percent if paid within 30 days B Approach f... View the full answer