You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit.
Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $150,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 9% are projected to be uncollectible. Additional collection costs are projected to be 3% of incremental sales (whether they actually end up collected or not), and production and selling costs …show more content…
Explain.
No, because the incremental Return on New Investment is lower at 16.5% compared to the required 18%.
Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 3 days.
1) If the company currently averages $30,000 in collections per day, how many dollars will this suggested cash management system frees up?
30,000*3=90,000
2) If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?
Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $150,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 9% are projected to be uncollectible. Additional collection costs are projected to be 3% of incremental sales (whether they actually end up collected or not), and production and selling costs …show more content…
Explain.
No, because the incremental Return on New Investment is lower at 16.5% compared to the required 18%.
Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 3 days.
1) If the company currently averages $30,000 in collections per day, how many dollars will this suggested cash management system frees up?
30,000*3=90,000
2) If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?