Excel Online Structured Activity: Tightening Credit Terms Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.07 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $1,945,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Assume that Vinson's variable cost ratio is 89%, taxes are 40%, and the interest rate on funds invested in receivables is 19%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions above. X Open spreadsheet Assuming a 365-day year, calculate the net income under the current policy and the new policy. Do not round intermediate calculations. Round your answers to the nearest dollar. Current policy: $ New policy: $ Should the change in credit terms be made? The firm should change its credit terms. 1 Tightening Credit Terms 2 3 Firm's current credit terms, net 4 Industry-wide credit terms, net 5 Discounts 6 Bad Debt Losses 7 Firm's variable cost ratio 8 Tax rate 9 Interest rate on funds invested in receivables 10 Days in year 11 12 Current Credit Policy: 13 Annual credit sales 14 Days sales outstanding, DSO 15 New Credit Policy, Tighten to 16 Industry-Average Credit Terms: 17 Annual credit sales 18 Days sales outstanding, DSO 19 90 days 30 days $0 $0 89.00% 40.00% 19.00% 365 $2,070,000 95 days $1,945,000 35 days Projected Income Statement Under Current Credit Policy $2,070,000 0 LIICULUI Credit Policy Change -$125,000 0 Projeced Income Statement Under New Credit Policy $1,945,000 0 20 Changing Credit Policy Analysis: 21 Gross sales 22 Discounts 23 Net sales 24 Variable costs 25 Profit before credit costs and taxes 26 Credit-related costs: 27 Cost of carrying receivables 28 Bad debt losses 29 Profit before taxes 30 Taxes 31 Net income 32 33 Should the change in credit terms be made? 34 35 Formulas 0 0 0 Projected Income Statement Under Current Credit Policy =B13 =$B$5 #N/A #N/A #N/A Effect of Credit Policy Change =F21-B21 =F22-B22 #N/A #N/A #N/A Projeced Income Statement Under New Credit Policy =B17 =$B$5 #N/A #N/A #N/A 36 Changing Credit Policy Analysis: 37 Gross sales 38 Discounts 39 Net sales 40 Variable costs 41 Profit before credit costs and taxes 42 Credit-related costs: 43 Cost of carrying receivables 44 Bad debt losses 45 Profit before taxes 46 Taxes 47 Net income #N/A #N/A =$B$6 =$B$6 #N/A #N/A #N/A #N/A =F28-B28 #N/A #N/A #N/A #N/A #N/A #N/A
