Auto Parts Inc. manufactures brake pads that it sells to distributors that focus on the automotive after-market
Question:
Auto Parts Inc. manufactures brake pads that it sells to distributors that focus on the automotive after-market (used cars), who then sell them to auto parts stores and auto service centers. Annual new car demand for brake pads is about 300 million sets of two and after-market demand is about 1 billion sets. Auto Parts Inc. has roughly 6% market share for the after-market, translating to annual sales of 60 million sets.
Terms of sale to its customers (the distributors) is currently cash only at time of sale. It is considering new terms of “net 30 days”, that would allow its customers to pay in 30 days. Based on the following information, determine if Auto Parts should offer the net 30-terms and assume all its customers would accept and begin paying 30 days after the sale. Auto Part’s required return is 1% per 30-day period. Assume you will make a sale now (time “0”), and then every period in the future (“perpetuity”) (every 30 days). Auto Parts thinks its sales will increase, with these new terms per the information below.
a. What is the NPV of the New Policy vs. the Current Policy? Should Auto Parts adopt the New Policy?
b. Refer to the information above. What is the break-even quantity for the New Policy vs. the Current Policy?
c. Refer to the information above. What is the impact on Accounts Receivable of the New Policy vs. the Current Policy, and how would you describe it in relation to your answer to (a) above?
Fundamental Managerial Accounting Concepts
ISBN: 978-0078025655
7th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Old