The company is considering offering new credit terms of net 60 days to all customers to...
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The company is considering offering new credit terms of net 60 days to all customers to drive sales. They believe the competitive advantage of this new policy would allow Canadian Drums Inc to increase the selling price of their product by $15.00 per unit and increase sales by 180 units per year. Variable costs are expected to remain at $90 per unit and bad debt expense will be 10 percent of total sales per year. (Note the wording here. Total Contribution Margin will go up for two reasons. First, there will be a price increase on the existing 2,500 drum sets being sold. Second, there will be an additional 180 drum sets sold at the new price. Perform your analysis on total sales and total contribution margin, not just the change in sales volume.) South American Drums Inc expects all customers will take advantage of the new terms (ie., they will all pay Apollo Inc 60 days after a sale is recorded). So, for the first time in the company's history they will have an accounts receivable balance in current assets and a bad-debt expense. The increase in sales will also mean an increase in the inventory they hold. Inventory is currently sitting at $480,000 and is expected to increase by 25.0 percent. The firm will finance the additional investment in working capital by using a line of credit (bank loan) which charges 12.0 percent interest per year. Required: a. Calculate the increase in current assets and the costs to finance that increase: b. Calculate the impact of changing the credit policy on contribution margin: c. Calculate the net impact of changing the credit policy: d. Would you offer the new credit terms? (Yes/No) Calculate the increase in current assets and the costs to finance that increase. (enter all numbers as whole numbers) Description (Enter all numbers as positive) Accounts Receivable Inventory Current Assets Bank Interest Cost b. Calculate the impact of changing the credit policy on contribution margin: Description (Enter all numbers as positive) Sales Variable Expenses Contribution Margin c. Calculate the net impact of changing the credit policy: Description (Enter all numbers as positive) Increase in Contribution Margin Increase in Bad Debts Bank Interest Cost Net Change New Would you offer the new credit terms? (Yes/No) New Old Old Difference Difference The company is considering offering new credit terms of net 60 days to all customers to drive sales. They believe the competitive advantage of this new policy would allow Canadian Drums Inc to increase the selling price of their product by $15.00 per unit and increase sales by 180 units per year. Variable costs are expected to remain at $90 per unit and bad debt expense will be 10 percent of total sales per year. (Note the wording here. Total Contribution Margin will go up for two reasons. First, there will be a price increase on the existing 2,500 drum sets being sold. Second, there will be an additional 180 drum sets sold at the new price. Perform your analysis on total sales and total contribution margin, not just the change in sales volume.) South American Drums Inc expects all customers will take advantage of the new terms (ie., they will all pay Apollo Inc 60 days after a sale is recorded). So, for the first time in the company's history they will have an accounts receivable balance in current assets and a bad-debt expense. The increase in sales will also mean an increase in the inventory they hold. Inventory is currently sitting at $480,000 and is expected to increase by 25.0 percent. The firm will finance the additional investment in working capital by using a line of credit (bank loan) which charges 12.0 percent interest per year. Required: a. Calculate the increase in current assets and the costs to finance that increase: b. Calculate the impact of changing the credit policy on contribution margin: c. Calculate the net impact of changing the credit policy: d. Would you offer the new credit terms? (Yes/No) Calculate the increase in current assets and the costs to finance that increase. (enter all numbers as whole numbers) Description (Enter all numbers as positive) Accounts Receivable Inventory Current Assets Bank Interest Cost b. Calculate the impact of changing the credit policy on contribution margin: Description (Enter all numbers as positive) Sales Variable Expenses Contribution Margin c. Calculate the net impact of changing the credit policy: Description (Enter all numbers as positive) Increase in Contribution Margin Increase in Bad Debts Bank Interest Cost Net Change New Would you offer the new credit terms? (Yes/No) New Old Old Difference Difference
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Lets break down the calculations step by step A Calculate the increase in current assets and the costs to finance that increase Increase in Inventory ... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 978-1111530266
11th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
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