ZEN Ltd. currently grants credit terms of net 20 days. The firmis considering a

Question

ZEN Ltd. currently grants credit terms of net 20 days. The firmis considering a relaxed policy of net 30 days. The price ofZEN’s product and its variable production costs will remainat $100 and $75, respectively. Expected sales will increase from100,000 to 120,000 units per year. Bad debt losses will increasefrom $100,000 to $200,000. ZEN will finance the additionalinvestment in receivables with a line of credit that costs 5%.ZEN’s marginal tax rate is 40%.

a.       What is ZEN’s netincome under the current policy?

       b.  What would beZEN’s net income under the proposed policy?

       c.  Explainwhether or not you would recommend a change in         policy?

Galactic Centre Ltd. (GCL) is a distributor of video gamesoftware. GCL enjoys a profit margin of 20% before deducting baddebt losses of 5% of sales. GCL recently reviewed its credit datafor the last five years to calculate a credit score for each of itscustomers based on a small number of easily obtained creditvariables. For every 100 accounts, it experienced the followingdefault rates:

                 Credit Score   Defaulted       Paid     Total

                 Above 600          3                83          86

                 Below 600          2                12          14

                 Total                   5                95       100

      a.   What isGCL’s current profit margin after accounting for bad debt              losses?

      b.   If GCL refused togrant credit to customers with credit scores    below 600, what impact would this have on the profit margin after          accountingfor bad debt losses? You may assume that each customer orders           $10,000 of merchandise per year.

      c.  Justify whether ornot GLC should restrict credit to only those    customerswith credit scores above 600.

Explanation / Answer

here are answers to the first question: a: 1,440,000 b: 1,680,000 c: yes, because the net profit after tax would be higher. However,we still don't know how much the extra 5% financing charge wouldcost in total dollars. d: 104,000 units are you still looking for help on the second question?

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