Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sterling Wyatt, the president of Howlett Industries, has been exploring ways of improving the company's financial performance. Howlett manufactures and sells office equipment to retailers.

Sterling Wyatt, the president of Howlett Industries, has been exploring ways of improving the company's financial performance. Howlett manufactures and sells office equipment to retailers. The company's growth has been relatively slow in recent years, but with an expansion in the economy, it appears that sales may increase more rapidly in the future. Sterling has asked Andrew Preston, the company's treasurer, to examine Howlett's credit policy to see if a change can help increase profitability.

The company currently has a policy of net 30. As with any credit sales, default rates are always of concern. Because of Howlett's screening and collection process, the default rate on credit is currently only 1.6 percent. Andrew has examined the company's credit policy in relation to other vendors, and he has found three available options.

The first option is to relax the company's decision on when to grant credit. The second option is to increase the credit period to net 45, and the third option is a combination of the relaxed credit policy and the extension of the credit period to net 45. On the positive side, each of the three policies under consideration would increase sales. The three policies have the drawbacks that default rates would increase, the administrative costs of managing the firm's receivables would increase, and the receivables period would increase. The effect of the credit policy change would impact all four of these variables to different degrees. Andrew has prepared the following table outlining the effect on each of these • variables:

Howlett’s variable costs of production are 45 percent of sales, and the relevant interest rate is a 6 percent effective annual rate.

QUESTION

Which credit policy should the company use?

TTT Annual Sales Default Rate Administrative Costs Receivables (Millions) (% of Sales) (% of Sales) Period 37 days 40 days 50 days 48 days Current Policy $144 1.6% 2.2% Option 1 168 2.5 3.2 Option 2 165 1.8 2.4 Option 3 180 2.2 3.0

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Credit policy If a company sells goods and services to customer it needs the cash before the delivery date or it can extend the credit period to custo... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Legal Ethical and Regulatory Environment of Business in a Diverse Society

Authors: Dawn Bennett Alexander, Linda Harrison

1st edition

73524921, 978-1259678103, 1259678105, 978-0073524924

More Books

Students also viewed these Finance questions

Question

=+how the customer arrived at their site.

Answered: 1 week ago

Question

What is the process for appointing a federal judge?

Answered: 1 week ago