Finance

WCM0 Apple Co has annual sales revenue of $6 million and all sales are on 30 days’ credit, although customers in average take ten days more than this to pay. Contribution represents 60% of sales and the company currently has no bad debts. Accounts Receivable are financed by an overdraft at an annual interest rateof 7%

Apple Co plan to offer an early settlement discount of 1.5% for payment within 15 days and to extend the maximum credit offered to sixty days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental cost equal to 0.5% of sales revenue. The discount is expected to be taken by 30% of customers, while the remaining customers taking an average 60 days to pay.

Requirements:

Evaluate whether the proposed change in credit policy will increase the profitability of Apple co.

ANS

Evaluation of change in credit policy

Current average collection period= 30+10=40 days

Current account receivable= 6m x 40/365 = $ 657,534

Average collection period under new policy = (0.3 x 15) = (0.7 x 60) =46.5 days

New level of credit sales =$6.3 million

Account Receivable after policy change=6.3 x 46.5 /365= $802,603

Increase in financing cost ( $802,603-$ 657,534)

$

Increase in financial cost 10,155

Incremental costs 6.3 m x0 .005 = 31,500

Cost of discount = 6.3 x 0.015 x 0.3 = 28,350

Increase in cost 70,005

Contribution from increased sales = 6m x 0.05 x 0.6 180,000

Net benefit of the policy change 109,995

The proposed policy change will increase the profitability of Apple co.

WCM1 FLG Co has annual credit sales of $4·2 million and cost of sales of $1·89 million. Current assets consist of inventory and accounts receivable. Current liabilities consist of accounts payable and an overdraft with an average interest rate of 7% per year. The company gives two months’ credit to its customers and is allowed, on...