Question
Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm's credit policies. Roche's
Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm's credit policies. Roche's average collection period is 60 days. The industry average, derived from the trade association data and information on three similar publishing companies, is 42 dayslong 30% lower than Roche's. Lisa estimated that if Roche initiated a 2.0% cash discount for payment within 10 days of the beginning of the credit period, the firm's average collection period would drop from 60 days to the 42-day industry average. She also expected the following to occur as a result of the discount: Annual sales would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and the 2.0% cash discount would be applied to 75% of the firm's sales. The firm's variable costs equal 80% of sales. Lisa knows that the resources invested in working capital have an opportunity cost for her firm of 12.0%. To Do Evaluate whether Roche's strategy for speeding its collection of accounts receivable would be acceptable. What annual net profit or loss would result from implementation of the cash discount? Assume 365 days in a year.
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