Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30;

 

East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales to $14,500,000, but it would also shorten the DSO on the sales to 30 days. Expected bad debt losses on the sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent. The tax rate is 40%. Assume 360 days a year. 1. What would be the bad losses before and after the change were made? 2. What would be the cost of carrying receivables before and after this change were made? 3. What are the pre-tax profits before and after this proposal? 4. What are the after-tax profits before and after this proposal? 5. What would be your recommendation on this new proposal?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Lets break down the questions one by one 1 Bad Debt Losses Before the change 5 of 15000000 750000 Af... 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

Managerial Accounting

Authors: Karen W. Braun, Wendy M. Tietz

5th edition

134128524, 978-0134128528

More Books

Students also viewed these Finance questions