OB1 Sabres Ltd. has determined that product sales are not what they could be because they have unused capacity. As a result, the company is considering adjusting its marketing strategy. At present, all sales to distributors are on a cash basis, but the competition offers credit terms. Similar credit terms for OB1 Sabres have been suggested. Research suggests that sales in the upcoming year would jump from $4.3 million annually to $5.5 million with credit terms of 2/10, net 30. Furthermore, research estimates that 75 percent of the customers would take the discount and the remainder would pay on average on the 30th day. Inventory turnover would remain at 15 times a year. Cost of goods sold (variable costs) are 75 percent of gross sales. Bad debts are estimated to be .75 percent of credit sales. Credit department expenses would be $50,000 per year plus the salary of two individuals at $35,000 per year each. One of the staff would be reassigned from another division without affecting costs or productivity as that individual is currently redundant in that division. Marketing expenses are 4 percent of gross sales. Bank financing of working capital requirements is at 11 percent.

a. Should OB1 Sabres Ltd. adopt the proposed policy?

multiple choice

No

Yes

b. Show the calculations. OB1 Sabres Ltd. calculates the inventory on the basis of the cost of goods sold. (Use 365 days in a year. Do not leave any empty spaces; input a "0" wherever required. Round the answers to the nearest whole dollar. Negative answers and the values to be deducted should be indicated by a minus sign. Enter answers in whole dollar, not in million. Do not round intermediate calculation. Omit $ sign in your response.)

Sales

Present policy $

New policy

$

Contribution margin

% $

Discount expense

Present policy $

New policy

$

Bad debt expense

Present policy $

New policy

$

Marketing expense

Present policy $

New policy

$

Administrative expense (related

to credit department)

Present policy $

New policy $

$

Investment in accounts receivable

Present policy $

New policy

75% of the customers $

25% of the customers

Opportunity benefit on investment in A/R

% $

Investment in inventory

Present policy $

New policy$

Opportunity benefit on inv. investment

%

Total incremental change $

of 15 tames a yent. Cost of goods sold (varisble costsi are 75 percent of gross wales. Gad detits the estimated to be 75 perted of ciedit a. Shoutd oet Sabres Lte adopt the proposed policy? the values to be deducted thould be Indicated by a minus tign. Enter antwert in whale dolias, not in milion. Do pat taynit Infermeeiste calculatlos. Orrit 8 sign in your responsed