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Evaluating Global Textiles' Proposed Change in Greditt asked to inves- tigate a proposed change in the firm's credit terms. The com president belheves t Ken

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Evaluating Global Textiles' Proposed Change in Greditt asked to inves- tigate a proposed change in the firm's credit terms. The com president belheves t Ken Steinbacher, a financial analyst for Global Textiles, has been as company's founder president believes that by increasing the credit period from 30 to 6s dater and important benefits will result: (1) sales will increase as a result of attracti customers, and (2) some existing customers will purchase merchandise sooner . ensure its availability, given the unpredictable timing of the selling season Annual sales are estimated to increase from the current level of $4,000 $4,800,000. Eig ys, two hty percent of this increase is expected to be attributable to to new customers, and 'he other 20 percent is expected to result from existi tomers. Because some existing customers will be making their purchases earlier than in the past, their actions will merely result in a shifting of inventory to accounts receivable. Ken estimated that the decline in inventory investment attributable to the actions of existing customers would just equal the additional accounts receivable investment associated with their actions. Ken's investigation indicates that with the extended credit period, the firm's average collection period will increase from 45 to 90 days. In addition, bad debts will increase from 1 to 2 percent of sales. The firm's variable costs are expected to continue to amount to 80 percent of each $1 of sales. Global currently requires a 16 percent rate of return on equal-risk accounts receivable investments and its cost of carrying $1 of inventory for 1 year is 26 cents. Required a. Find the additional annual profit contribution expected from the increased credit period. b. Determine the increase in Global's average investment in accounts receivable and the resulting annual cost attributable to the proposed increase in the c. Calculate the annual savings resulting from the reduced inventory investment d. Calculate the annual cost expected to result from the increase in bad debt e. Use your findings in a through d to advise Ken on whether or not the pro- credit period attributable to the existing customers' earlier purchases. expenses attributable to the proposed lengthening of the credit period. posed increase in the credit period can be financially justified. Explain your f. What impact, if any, would ignoring the effect of the proposed increase in the recommendation credit period on the level of inventory investment found in c have on your rec- ommendation in e? Explain. CASA DE DISENO

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