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Please answer all questions and show all calculations. 4. Evaluation of a proposed change in credit customers Aa Aa Making changes to a firm's credit
Please answer all questions and show all calculations.
4. Evaluation of a proposed change in credit customers Aa Aa Making changes to a firm's credit policy involves trade-offs. Assume that all other factors remain constant and that a firm modifies its credit standards to make them more conservative to exclude a group of credit customers. Under these circumstances, it is reasonable to expect the following changes: 1. The firm's volume of credit sales will 2. The average creditworthiness of the firm's credit customers will 3. The firm's bad-debt expenses will 4. The firm's collection costs will Consider the case of Ohio Green Furniture Company (OGFC) Ohio Green Furniture Company (OGFC), a wholesaler of home furniture products made with farm-raised exotic woods, currently sells on terms of 1/10 net 30 to its regional customers. These are customers located within 500 miles of its corporate headquarters in Columbus, Ohio. It has current credit sales of $4,500,000, and under a new growth in it is considering expanding the geographic span of its market by offering the same credit terms to customers beyond its current 500-mile limit. The assumptions made in the course of the analysis include the following: OGFC expects to generate additional sales equal to 15% of its existing credit sales. The average collection period (ACP) will be 65 days, and the bad debt loss ratio will be 4% Approximately 10% of the new customers will take advantage of the cash discount. To satisfy the additional demand for product, additional inventory equal to 5% of sales will be required The variable cost ratio is, and is expected to remain, equal to 60% of sales. The firm can earn a return of 12% on its current asset investments. The creditworthiness of the new credit customers will be the same as that of the firm's existing credit customers
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