SMS Co. has sales of P3 million. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period of 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs
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- Bulldogs Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year)Bulldogs Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year) A. P177,750 B. P106,000 C. P171,000 D. P161,250Smith Inc. has sales of P3,000,000. Its credit period and average collection period are both 30 days and 1% of its sales end up as bad debts. The general manager intends to extend the credit period to 45 days which will increase sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. The change in the credit policy would result to increase (decrease) in incremental profit of (Use 360 days a year)* A. 171k B. 177,750 C. 161,250 D. 106k
- Lebo Lamps Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Lebo lamps experiences a bad-debt rate of 0.8% of debtors annually. The company's current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Lebo lamps Ltd has contacted MBD Ltd, a factoring firm, and has been quoted: A factor charge of 1.8% of credit sales (Lebo lamps Ltd estimates that this would save R25 000 administration costs per year) An advance of 75% of invoices at 3% over base-rate. Should the factoring firm MBD Ltd terms be agreed to?A company can issue a 90-day $5 million commercial paper at a rate of 6.55%. It can reduce the rate to 6.35% if it is backed by a standby letter of credit (SBLC). A bank is willing to issue the SBLC for a fee of 10 basis points. a) Should the company obtain an SBLC? Explain why or why not? b) Explain the formula - Expected loss = EAD × PD × LGDA company currently extends a credit period of 38 days to its debtors. It intends to change the credit period to 3.5/15 net 52 in order to increase sales. The proposed change in credit terms will have the following implications. Sales will increase by sh. 12,000,000 per annum of which sh.1,800,000 will qualify for discounts. Bad debts on the additional sales will be 2% Production, selling and administration expenses will be 80% of the additional sales. Opportunity costs are estimated to be 14% of the increased investment in receivables. The minimum return expected by the company on all its investments is 14% Required: Advise the management on whether to revise its credit policy.
- Dome Metals has credit sales of $450,000 yeariy with credit terms of net 45 days, which is also the average collection perlod. a. Assume the fnrm offers a 2 percent discount for payment in 18 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 12 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.)L Co is considering whether to factor its sales invoices. A factor has offered L Co a non recourse package at a cost of 1.5% of sales and an admin fee of $6,000 per annum. Bad debts are currently 2% of sales per annum and sales are $1.5m per annum. What is the cost of the package of L Co?Pedro Corp. currently has sales of P2,000,000, and its days sales outstanding is 2 week. The financial manager estimates that offering longer credit terms would increase the days sales outstanding to 3 weeks and increase the sales by 50%. However, bad debts losses, which were 1% on the old sales, would amount to 2% only on incremental sales. Variable cost is 70% of sales. Pedro Corp. has a 10% receivable financing cost. Use 360 days per year. a. What is the incremental increase in the balance of AR? b. What is the Change in carrying cost? Indicate if an increase or decrease c. What would the annual incremental pre-tax profit be if Pedro Corp. extended its credit period?
- Tyres Ltd sells tyres on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 11 days. It is expected that this will change to 40 days under the new standards. Sales are expected to increase from R100m to R105m. No discounts are offered and bad debts are negligible (zero). The company can borrow short term funds at a rate of 10% and has a gross profit margin of 15%. What would the net effect of changing its credit standards on its net profit be? a.-R841 096 b. -R91 096 c. R750 000 d. R1 500 000Pedro Corp. currently has sales of P2,000,000, and its days sales outstanding is 2 week. The financial manager estimates that offering longer credit terms would increase the days sales outstanding to 3 weeks and increase the sales by 50%. However, bad debts losses, which were 1% on the old sales, would amount to 2% only on incremental sales. Variable cost is 70% of sales. Pedro Corp. has a 10% receivable financing cost. Use 360 days per year, What is the incremental increase in the balance of AR? What is the Change in carrying cost? Indicate if an increase or decrease? What would the annual incremental pre-tax profit be if Pedro Corp. extended its credit period?Axis Wells and Excavation (AWE) currently generates $198,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $189,000, and accounts receivable will average $12,600. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSOExisting: days DSONew: days