Your first major assignment after your recent promotion at Ice Nine involves overseeing the management of accounts receiv- be able and inventory. The first item that you must attend to in- volves a proposed change in credit policy that would involve relaxing credit terms from the existing terms of 1/50, net 70 to 2/60, net 90 in hopes of securing new sales. The management at Ice Nine does not expect bad debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem. New sales level (all credit) $8,000,000 Original sales level (all credit) $7,000,000 Contribution margin 25% Percent bad debt losses on new sales 8% New average collection period 75 days Original average collection period 60 days Additional investment in inventory $50,000 Pre-tax required rate of return 15% New percent cash discount 2% Percent of customers taking the new cash discount 50% Original percent cash discount 1% Percent of customers taking the old cash discount 50% To help in your decision on relaxing credit terms, you have been asked to respond to the following questions: (a) What determines the size of the investment Ice Nine makes in accounts receivables? (b) If a firm currently buys Ice Nine on trade credit with the present terms of 1/50, net 70 and decides to forgo the trade credit discount and pay on a net day, what is the annualized cost to that firm of forgoing the discount? (c) If Ice Nine changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Ice Nine and decides to forgo the trade credit discount and pay on a net day?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Your first major assignment after your recent promotion at Ice Nine involves overseeing the
New sales level (all credit) | $8,000,000 |
Original sales level (all credit) | $7,000,000 |
Contribution margin | 25% |
Percent bad debt losses on new sales | 8% |
New average collection period | 75 days |
Original average collection period | 60 days |
Additional investment in inventory | $50,000 |
Pre-tax required |
15% |
New percent cash discount | 2% |
Percent of customers taking the new cash discount | 50% |
Original percent cash discount | 1% |
Percent of customers taking the old cash discount | 50% |
To help in your decision on relaxing credit terms, you have been asked to respond to the following questions:
(a) What determines the size of the investment Ice Nine makes in accounts receivables?
(b) If a firm currently buys Ice Nine on trade credit with the present terms of 1/50, net 70 and decides to forgo the trade credit discount and pay on a net day, what is the annualized cost to that firm of forgoing the discount?
(c) If Ice Nine changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Ice Nine and decides to forgo the trade credit discount and pay on a net day?
(d) What is the estimated change in profits resulting from the increased sales less any additional
(e) Estimate the cost of additional investment in account receivable and inventory associated with the proposed change in credit policy.
(f) Estimate the change in the cost of the cash discount if the proposed change in credit policy is enacted.
(g) Compare the incremental revenues with the incremental costs. should the propose change be enacted?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images