Logan Distributing Company sells small appliances to hardware stores throughout the west. Joe Logan, the president of the company, is thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/10, net 30, and the new policy would call for a 3/10, net 50. Currently, 30 percent of Logan customers are taking the discount, and it is anticipated that the number would go up to 45 percent with the new discount policy. It is further anticipated that annual sales would increase from a level of $400,000 to $600,000 as a result of the change in the cash discount policy. The increased sales would also affect the inventory level carried by Logan. The average inventory carried by Logan is based on a determination of an EOQ. Assume unit sales of fans and heaters will increase from 15,000 to 22,500 units. The ordering cost for each order is $200 and the carrying cost per unit is $1.50 (these values will not change with the discount). Each unit in inventory has an average cost of $12.00. Cost of goods sold is equal to 65 percent of net sales, general and administrative expenses are equal to 15 percent of net sales, and interest payments of 14 percent will be necessary only for the increase in the accounts receivable and inventory balances. Taxes will equal 40 percent of before-tax income. a. Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (Total sales - Cash discounts) to determine the average daily sales and the accounts receivable balances. b. Determine EOQ before and after the change in cash discount policy. Translate this into average inventory (in units and dollars) before and after the change in the cash discount policy. c. Complete the income statement before and after the policy change. d. Should the new cash discount policy be utilized? Explain your position. Use the key facts below and information from the problem to complete the templates below. You may attach your supporting work which will be considered for partial marks. Otherwise the points will be based on right or wrong. Key Facts: Before After Sales level $400,000 $600,000 Anticipated sales level 15,000 22,500 Discount 1% 3% % taking discount 30% 45% Ordering cost per order $200.00 Carrying cost per unit $1.50 Average cost per unit $12.00 a. Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (Total sales - Cash discounts) to determine the average daily sales and the accounts receivable balances. Before Policy Change Average collection period Average daily sales Accounts receivable days 1pt 1pt #VALUE! days After Policy Change Average collection period Average daily sales Accounts receivable 1pt 1pt #VALUE! b. Determine EOQ before and after the change in cash discount policy. Translate this into average inventory (in units and dollars) before and after the change in the cash discount policy. Before After appliances #VALUE! units EOQ Average inventory Average inventory ($) 2pts #VALUE! 2pts 2pts 2pts c. Complete the income statement before and after the policy change. Before After Net sales Cost of goods sold Gross profit #VALUE! #VALUE! General and administrative Operating profit #VALUE! #VALUE! Opportunity cost of AIR and inventory investment Income before taxes Taxes #VALUE! #VALUE! Income after taxes 2pts 2pts 2pts 2pts 10pts d. Write a brief memorandum in Word with your recommnendation? Start the memo as follows: To: Mr. Loagan From: Student Intern Date: Winter 2021 Subject: Change of Credit Policy
