Accounts Receivable Management Set a Solutions

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Chapter 20

ACCOUNTS RECEIVABLEMANAGEMENT



20-1A

If a firm buys on trade credit terms of 2/10, net 50and decides to forgo the trade credit discount andpay on the net day, what is the effective annualized

cost of forgoing the discount?



where a = amount of the discount

b = the discount period

c = the net period

bca

a

360x

1

18.37%10-50

360

x02.01

02.0!



20-2A

If a firm buys on trade credit terms of 2/20, net 30and decides to forgo the trade credit discount andpay on the net day, what is the effective annualized

cost of forgoing the discount?





c = the net period

bca

a

360x

1

73.47%20-30

360

x02.01

02.0!



20-3A

a. 1/10, net 20

b. 2/10, net 30

c. 3/10, net 30

d. 3/10, net 60

e. 3/10, net 90

f. 5/10, net 60

Determine the effective annualized cost of forgoing the trade credit discount on thefollowing terms:





c = the net period

bca

a

360x

1

36.36%10-20

360

x01.01

01.0

)(!

a



36.73%

10-30

360x

02.01

02.0)( !

b

55.67%10-30

360x

03.01

03.0)( !

c

22.27%10-60

360x03.01

03.0)( !

d

13.92%

10-90

360x

03.01

03.0)( !

e

37.89%10-60

360x

05.01

05.0)( !

f



20-4A



Applicant #1

Z = 3.3(0.2) + 1.0(0.2) + 0.6(1.2) + 1.4(0.3) + 1.2(0.5)

Z = 0.66 + 0.2 + 0.72 + 0.42 + 0.6

Z = 2.6 < 2.7 thus, reject Applicant #2

Z = 3.3(0.2) + 1.0(0.8) + 0.6(1.0) + 1.4(0.3) + 1.2(0.8)

Z = 0.66 + 0.8 + 0.6 + 0.42 + 0.96

Z = 3.44 > 2.7 thus, accept Applicant #3

Z = 3.3(0.2) + 1.0(0.7) + 0.6(0.6) + 1.4(0.3) + 1.2(0.4)

Z = 0.66 + 0.7 + 0.36 + 0.42 + 0.48

Z = 2.62 < 2.7 thus, reject



Applicant #4

Z = 3.3(0.1) + 1.0(0.4) + 0.6(1.2) + 1.4(0.4) + 1.2(0.4)

Z = 0.33 + 0.4 + 0.72 + 0.56 + 0.48


Applicant #5Z = 3.3(0.3) + 1.0(0.7) + 0.6(0.5) + 1.4(0.4) + 1.2(0.7)

Z = 0.99 + 0.7 + 0.30 + 0.56 + 0.84

Z = 3.39 > 2.7 thus, accept

Applicant #6

Z = 3.3(0.2) + 1.0(0.5) + 0.6(0.5) + 1.4(0.4) + 1.2(0.4)Z = 0.66 + 0.5 + 0.30 + 0.56 + 0.48




20-6A



Step 1: Estimate the Change in Profit.

= ($1,000,000 x .20) - ($1,000,000 x .08)

= $200,000 - $80,000

= $120,000



Step 2: Estimate the cost of additional investmentin accounts receivable and inventory.

Estimate the additional investment in accountsreceivable:

= ($6,000,000 / 360) x 90 - ($5,000,000 / 360) x 60= $1,500,000 - $833,333= $666,667 Additional accounts receivable and inventory times the

required rate of return:= ($666,667 + $50,000) .15= $107,500



Step 3: Estimate the change in the cost of the cashdiscount

= $0 (no change)

Step 4: Compare incremental revenues withincremental costs.

= Step 1 - (Step 2 + Step 3)

= $120,000 - $107,500

= $12,500

The policy should be adopted.



20-7A

FoxBase Alpha Corporation is considering a major

change in credit policy. Managers are considering

extending credit to a riskier class of customer and

extending their credit from net 30 days to 45 days .

They do not expect bad debts losses on their current

customers to change. Given the ff. information should

they go ahead with the change in credit policy?



New Sales Level (all credit) $ 12,500,000

Original Sales Level (all credit) $11,000,000

Contribution Margin 20%

Percent bad debt losses on new sales 9%

New Average Collection Period 45 days

Original Average Collection Period 30 days

Additional Investment in Inventory $ 75,000Pre-Tax required rate of return 15%



Step 1: Estimate the Change in Profit.

= ($1,500,000 x .20) - ($1,500,000 x .09)

= $300,000 - $135,000

= $165,000



Step 2:Estimate the cost of additional investment inaccounts receivable and inventory.

Estimate the additional investment in accounts receivable:

= ($12,500,000 / 360) x 45 - ($11,000,000 / 360) x 30= $1,562,500 - $916,667

= $645,833

Additional accounts receivable and inventory times the

required rate of return:= ($645,833 + $75,000) .15

= $108,125



Step 3: Estimate the change in the cost of thecash discount

= $0 (no change)

Step 4: Compare the incremental revenues withthe incremental costs.

= Step 1 - (Step 2 + Step 3)

= $165,000 - $108,125= $56,875

The policy should be adopted.

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