Dalrymple Grocers buys on credit terms of 2/10, let 30 days and it always pays o
ID: 2768890 • Letter: D
Question
Dalrymple Grocers buys on credit terms of 2/10, let 30 days and it always pays on the 30th day. Dalrymple calculates that its annual total dollar amount of discounts lost is $375,000. What is the firm's average accounts payable balance? 375 000 = annual sales annual sales = 18750 000 daily sales = 18750 000/365 = 51369.86 average account payable = 51369.86 times 30 = $1,541,095.89 (The following information applies to the next four parts.) Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. What would be the cost to Berkeley of the discounts taken? effective annaul rate = [(1 + discount% / (1 - discount%)^360/days to pay - days of discount_-1 2/10 net 30 = [(1 + 2%/98%]^360/20_-1 = 43. 86% What would be the change in bad debt loses if the change were made? bad debt without discount = 15,000,000 times 5% = 750 000 bad debt with discount = 15,500,000 times 4% = 620 000 750 000 - 620 000 = 130 000 There will be a decrease of $130 000 bad debt From $750 000 without discount to $620, 000 with discount What would be the difference in the cost of carrying receivables from the current policy to the proposed policy? Cost of carrying receivable = DSO (sales/day) (V) (R) old cost of carring receivable = 60(15 000 000/365) (0.6) (0.15) = 221917.81 new cost of carring receivable = 30(15 000 000/365) (0.6) (0.15) = 114657.58 221917.81 - 114657.58 = 107260.28 There will be decrease of $107,260.28 in cost of curring receiable dropping from in old policy into $11 465.53 in new policy What is the effect on pre-tax profits from this proposal?Explanation / Answer
(5) Annual Sales = $ 375,000 / 2 x 100 = $ 18,750,000
Average Accounts Payable Balance = $ 18,750,000 / 360 x 30 = $ 1,562,500
(6)
(a) Cost to Berkeley of Discounts Taken =[ 2/(100-2)] x [360/(30-10)]
= 36.73%
(b) Changes in Bad Debt Losses = ($ 15,000,000 x 5%) - (($ 15,000,000 + $ 500,000) x 4%)
= $ 130,000
i.e. Bad Debts Losses would decrease by $ 130,000
(c) Difference in cost of carrying receivables = ($ 15,000,000 x 15% x 60 / 360) - ($ 15,500,000 x 15% x 30 / 360)
= $ 181,250
i.e. Cost of Carrying receivables declines by $ 181,250
(d) Effect on Pre-tax profits from this proposal
With decrease in Cost of Carrying and Bad Debts, there is an increase in Pre-tax profit from New Policy
Particulars Old Policy ($) Change ($) New Policy ($) Gross Sales 15,000,000 + 500,000 15,500,000 Less: Discount 0 + 310,000 310,000 Net Sales 15,000,000 + 190,000 15,190,000 Variable Cost 9,000,000 + 300,000 9,300,000 Gross Profit 6,000,000 - 110,000 5,890,000 Cost of Carrying 375,000 - 181,250 193,750 Bad Debts 750,000 - 130,000 620,000 Pre-tax Profit 4,875,000 + 201,250 5,076,250Related Questions
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