Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 22, Problem 6P
Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit.
Vinson’s variable cost ratio is 85%, and taxes are 40%. If the interest rate on funds invested in receivables is 18%, should the change in credit terms be made?
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Students have asked these similar questions
A company plans to tighten its credit policy. The new policy will decrease the average number of days
in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% -
60%. The company estimates that projected sales would be 5% less if the proposed new credit policy
is implemented. If projected sales for the coming year are P50 million, calculate the estimated peso
change in the firm's account receivable balance caused by this proposed change in credit policy.
Assume a 365-day year. [Answer format: INCREASE 1234567]
Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation, was
alarmed to find that Vinson sells on credit terms of net 90 days while
industry-wide credit terms have recently been lowered to net 30 days.
On annual credit sales of $2.18 million, Vinson currently averages 95
days of sales in accounts receivable. Mitchell estimates that tightening
the credit terms to 30 days would reduce annual sales to $2,055,000,
but accounts receivable would drop to 35 days of sales and the savings
on investment in them should more than overcome any loss in profit.
Vinson's variable cost ratio is 82%, taxes are 40%, and the interest rate
on funds invested in receivables is 21%. Assuming a 365-day year,
calculate the cost of carrying receivables under the current policy and
the new policy. Enter your answers as positive values. Do not round
intermediate calculations. Round your answers to the nearest dollar.
Current policy: $
New policy:
Should the change in credit terms be…
ALei Industries has credit sales of
$146
million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of
35
days.
a. What is the maximum level of accounts receivable that ALei can carry and have a
35-day
average collection period?
b. If ALei's current accounts receivable collection period is
55
days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of
35
days?
Chapter 22 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 22 - Prob. 1QCh. 22 - Prob. 2QCh. 22 - Is it true that if a firm calculates its days...Ch. 22 - Firm A had no credit losses last year, but 1% of...Ch. 22 - Indicate by a (+), (), or (0) whether each of the...Ch. 22 - Cost of Bank Loan On March 1, Minnerly Motors...Ch. 22 - Cost of Bank Loan Mary Jones recently obtained an...Ch. 22 - Del Hawley, owner of Hawleys Hardware, is...Ch. 22 - Gifts Galore Inc. borrowed 1.5 million from...Ch. 22 - Relaxing Collection Efforts The Boyd Corporation...
Ch. 22 - Tightening Credit Terms Kim Mitchell, the new...Ch. 22 - Effective Cost of Short-Term Credit Yonge...Ch. 22 - Monitoring of Receivables
The Russ Fogler Company,...Ch. 22 - Prob. 10PCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MCCh. 22 - Prob. 6MCCh. 22 - Prob. 7MCCh. 22 - Assume that it is now July of Year 1 and that the...Ch. 22 - Now assume that it is several years later. The...Ch. 22 - Prob. 10MCCh. 22 - Prob. 11MCCh. 22 - Prob. 12MCCh. 22 - Prob. 13MCCh. 22 - Prob. 14MCCh. 22 - Suppose the firm makes the change but its...
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