Individual Case #2 – Fall 2016
Finish the assignment and all of the information include in attach fileÂ
Individual Case #2 – Fall 2016 Wholesale Building Supply Changes in Credit Terms Rich Jackson, a recent finance graduate, owns a wholesale building supply business with his brother, Jim, who majored in building construction. The firm sells primarily to general contractors. Sales are slow during the cold months, rise during the spring, and then fall off again in the summer, when new construction in the area slows. The brothers are concerned about the firm’s current credit policy. The terms of sale are net 35, but the brothers expect only 75% of the customers (by dollar value) to pay the full amount on day 35, while the other 25% pay, on average, on Day 45. Gross sales are currently $1,100,000 per year. Of the gross sales, 2% end up as bad debt losses. The brothers are considering a change in credit policy. The change would entail 1) changing the credit terms to 1.5/10, net 30, 2) employing stricter credit standards before granting credit, and 3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 1.5% discount, but all others would have to the pay the full amount within 30 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm – after all, the discount amounts to a price reduction. The net expected result is for sales to increase to $1,250,000, for 55% of the paying customers to take the discount and pay on the 10 th day, for 35% to pay the full amount on day 30, for 10% to pay late on day 40, and for bad debt losses to fall from 2% to 1.5% of gross sales. The firm’s operating (variable) cost ratio will remain unchanged at 65%, and its cost for financing receivables (notes payable or required return on investments) will remain unchanged at 6%. The company would have to purchase some new inventory to cover the additional sales. Inventory turnover averages 6 times per year. The current income statement with relevant information is given below.
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Posted 09 Dec 2017 08:12 AM
My Price 10.00
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