Problem $7-33$

OB$1$ Sabres Ltd$.$ has determined that product sales are not what they could be because they have unused capacity. As a result, the company is considering adjusting its marketing strategy. At present, all sales to distributors are on a cash basis, but the competition offers credit terms. Similar credit terms for OB$1$ Sabres have been suggested. Research suggests that sales in the upcoming year would jump from $$4\mathrm{.}34$ million annually to $$5\mathrm{.}58$ million with credit terms of $\frac{1}{10},$ net $30.$ Furthermore, research estimates that $85$ percent of the customers would take the discount and the remainder would pay on average on the $30$th day. Inventory turnover would remain at $13$ times a year. Cost of goods sold $($variable costs$)$ are $75$ percent of gross sales. Bad debts are estimated to be $0\mathrm{.}75$ percent of credit sales. Credit department expenses would be $$50,800$ per year plus the salary of $2$ individuals at $$35,800$ per year each. One of the staff would be reassigned from another division without affecting costs or productivity as that individual is currently redundant in that division. Marketing expenses are $4$ percent of gross sales. Bank financing of working capital requirements is at $11$ percent.

a$.$ Should OB$1$ Sabres Ltd$.$ adopt the proposed policy? multiple choice

No

Yes

b$.$ Show the calculations. $($Use $365$ days in a year. Do not leave any empty spaces; input a $"0"$ wherever required. Round the answers to the nearest whole dollar. Negative answers and the values to be deducted should be indicated by a minus sign. Enter answers in whole dollar, not in million. Do fot round intermediate calculation.$)$

$\frac{?}{{?}_{\frac{?}{?}}}$ Sales

Present policy

New policy

$\frac{?}{{?}_{\frac{?}{?}}}$ Contribution margin

$\frac{?}{{?}_{\frac{?}{?}}}$ Discount expense

Present policy

New policy

$\frac{?}{{?}_{\frac{?}{?}}}$ Bad debt expense Present policy New policy

$\frac{?}{{?}_{\frac{?}{?}}}$ Marketing expense Present policy New policy

$\frac{?}{{?}_{\frac{?}{?}}}$ Administrative expense $($related to credit department$)$ Present policy New policy

$\frac{?}{{?}_{\frac{?}{?}}}$ Investment in accounts receivable Present policy New policy $85\%$ of the customers $15$ s of the customers

$\frac{?}{{?}_{\frac{?}{?}}}$ Opportunity benefit on investment in $\frac{A}{R}$

$$ Investment in inventory Present policy New policy

$$ Opportunity benefit on inv. investment Total incremental change