Question
Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This
Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 120 days and that the bad-debt loss ratio would be 12%. The firm's variable cost ratio is 0.70, making its profit contribution ratio 0.30. Bluegrass Distilleries would invest an additional $3 million in inventory. Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables and inventory investments is 15%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine the net effect on Bluegrass Distilleries' pretax profits of extending credit to these (previously delinquent) customers. Should the firm proceed with the credit extension?
DO NOT COPY AND PASTE FROM THE SAME QUESTION
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started