Logan
Distributing Company of Atlanta sells fans and heaters to retail outlets
throughout the Southeast. Joe Logan, the president of the company, is thinking
about changing the firmÂ’s credit policy to attract customers away from
competitors. The present policy calls for 1/10, net 30 cash discount. The new
policy would call for a 5/10, net 50 cash discount. Currently, 40 percent of
Logan customers are taking the discount, and it is anticipated that this number
would go up to 60 percent with the new discount policy. It is further
anticipated that annual sales would increase from a level of $300,000 to
$800,000 as a result of the change in the cash discount policy.
The
increased sales would also affect the inventory level. The average inventory
carried by Logan is based on a determination of an EOQ. Assume sales of fans
and heaters increase from 12,000 to 24,000 units. The ordering cost for each
order is $250, and the carrying cost per unit is $2.00 (these values will not
change with the discount). The average inventory is based on EOQ/2. Each
inventory has an average cost of $11.50.
Cost
of goods sold is equal to 60 percent of net sales; general and administrative
expenses are 15 percent of net sales; and interest payments of 14 percent will
only be necessary for the increase in the accounts receivable and inventory
balances. Taxes will be 35 percent of before-tax income.
a.
Compute the accounts receivable balance before and after the change in the cash
discount policy. Use the net sales (total sales minus cash discounts) to
determine the average daily sales.
b.
Determine the EOQ before and after the change in the cash discount policy.
Translate this into average inventory (in units and dollars) before and after
the change in the cash discount policy.
c.
Compute the following income statement.
d.
Should the new cash discount policy be utilized? Briefly comment.
PREVIEW [EXCEL TEMPLATE]
LOGAN
RESPONSE SHEET
present
policy
|
1%
|
discount
|
Before
Policy Change
|
After
Policy Change
|
|||
10
|
in
|
Net
Sales
|
298,800
|
776,000
|
|||
30
|
net
|
COGS
|
179,280
|
465,600
|
File name: Logan-Response-Sheet.xls File type: application/vnd.ms-excel Price: $12
