Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is

ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40

New sales level (all credit sales) $ 24,000,000

Original sales level (all credit sales) $ 20,000,000

Contribution Margin ration 30%

%bad debt losses on new sales level 5%

%bad debt losses on original sales level 2%

New average collection period (days) 26

Original average collection period (days) 15

Cost of Capital 10%

Cost of Goods sold as a percentage of sales 60%

ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales.

Inventory turnover on new sales level 10

Inventory turnover on original sales level 5

Financing cost for Working Capital is 10%

Tax rate 40%

Current Liabilities for XYZ zero dollars

Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Financial Accounting

Authors: Richard Lewis, David Pendrill

6th Edition

0273638335, 978-0273638339

More Books

Students also viewed these Accounting questions

Question

Describe the Big Five personality dimensions.

Answered: 1 week ago

Question

Identify three personal human relations goals for the course.

Answered: 1 week ago