glen Gnu Compm' Clear Glass Company has forecast its total funds requirements for the coming year as shown in the following table. $ 2,000,000 July 3 12,000,000 2,000,000 August 14,000,000 2,000,000 September 9,000,000 4,000,000 October 5,000,000 6,000,000 November 4,000,000 9 000 000 December 3 000 000 Then, the board is currently investigating to improve rm's performance through two plans, an offering any discounts, and a change in the collection of accounts receivable without debt bad. Clear Glass Company currently sells on credit only and does not offer any discounts. It reported sales are 300,000 units and selling price is $400 per unit. It takes 60 days to collect accounts receivable. The variable cost is $3 20 per container. The rst is considering offering a 5% discount for payment within 15 days. If the discount is implemented, it is expected that sales will increase to 380,000 units, 80% of sales will take the discount, and the average collection period will fall to 30 days. The rm's required rate of return is 20% (Note: Use a 365-day year). The second is investigating a change in the collection of accounts receivable without debt bad that is expected to result in a 20% increase in credit sales and a 10% increase in the average collection period. No change in bad debt is expected. The rm's opportunity cost on its investment in accounts receivable is 12%. (Note: Use a 365-day year.) To do a. Divide the rm's monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. b. Describe the amount of long-term and short-term nancing used to meet the total funds requirement under (1) an aggressive mdi'ng strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to nance seasonal needs. c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the rm can earn 3% on any excess cash balances. d. Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy. e. Based on the two management's considering to improve performance, which one would you recommend the rm implement the proposed change? Why ? *IHI Page 1 of 1
