The majority of Koebel's Family Bakery's sales are paid by cash, debit card, or bank credit card. In a few cases, it has extended credit to select customers, including Coffee Beans. To date, Koebel's has been giving Coffee Beans 30 days to pay for the weekly delivery of cupcakes. Generally, Coffee Beans is taking 45 days to pay each invoice issued. As a result, Janet and Brian have had to pay close attention to cash available to purchase additional inventory and pay monthly salaries. Although Janet, Brian, and Natalie are happy to have taken on the additional work, they are reconsidering the credit terms they are prepared to offer Coffee Beans. As well, they are attempting to establish a consistent credit policy as they continue to discuss with Biscuits the possibility of a weekly contractual commitment to sell chocolate chip cookies.

They are meeting with Bruce Anderson, the president of Coffee Beans, to discuss their ongoing business relationship.

Bruce has wanted to meet because the demand for cupcakes has increased significantly and it is anticipated that the number of cupcakes required on a weekly basis will double. He would like to continue to have Koebel's prepare the cupcakes on Coffee Beans' behalf and wants to ensure that they can meet the additional demand. Natalie, Janet, and Brian would like to review the terms of sale with Bruce and suggest a reduction of the payment period to 15 days.

However, before meeting with Bruce they want to consider all of the possible effects of reducing terms of sale from 30 to 15 days.

Instructions

(a) Identify to Natalie, Janet, and Brian some of the advantages and disadvantages of reducing credit terms to Coffee Beans (and other potential customers) from 30 days to 15 days.

(b) If Koebel's Family Bakery decides to continue providing cupcakes to Coffee Beans and doubles the number of cupcakes it produces, what are some of the effects this will have on Koebel's operations and cash flows?

(c) Can you provide other alternatives to Koebel's Family Bakery to encourage Coffee Beans to pay on time?