Manning Alternatives presently sells to its customers on terms of 2/10, net 30. Its average collection period
Question:
Manning Alternatives presently sells to its customers on terms of 2/10, net 30. Its average collection period is 14 days, with 85 percent currently taking the discount.
All sales are credit sales. Upper management has expressed concern about sluggish sales, and the marketing department would like a more attractive credit package.
Next year's sales are projected to be $2,600,000. It has been estimated that with terms of 3/10, net 60, sales next year would jump to $3,500,000 and 65 percent of sales would take the discount, but the average collection period would increase to 31 days. Manning's contribution margin of 5 percent would hold with the expansion of sales, as would its short-term financing cost of 11 percent. Should Manning Alternatives initiate the change in credit policy?
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta