Sat 2 100 Accounts Receivable This problem is to be use for

Sat 2: 100% Accounts Receivable This problem is to be use for the next eight questions of the The PARA Company sales are $2 exam million. Its variable costs are 65 and excess capacity would permit a substantial percent of sales, expansion in sales without additional fixed costs. Management is considering a change in credit policy, and you are asked to analyze the potential benefits of the change. Currently, the company sells on terms of 2/10 net 30. Twenty percent of its customers take the discount with the remaining paying on average in 40 da Bad debt losses are running at 4% of sales. The costs of capital tied up in receivables is 15 percent PARA is considering changing the terms of trade from 2/10 net 30 to 5/10, net 30. Half of PARA\'s Customers will take the new discount and pay on the 10th day. The other half will have an ACP of 40 days. Sales will increase by $600,000 and bad debt losses will decline to 3% of total sales. Hide acB Olk Air

Solution

1) Old Credit Period

2/10 net 30 means 2% discount will be given if customers pay within 10 days, otherwise the whole amount is payable within 30 days.

Probability of customers taking the discount and paying within 10 days = 20%

Remaining customers who do not take discount and pay within 40 days = 80%

Old credit period = 10 days x 20% + 40 days x 80% = 34 days

2) New Credit Period

Similarly, 5/10 net 30 means 5% discount will be given if customers pay within 10 days, otherwise the whole amount is payable within 30 days.

Probability of customers taking the discount and paying within 10 days = 50%

Remaining customers who do not take discount and pay within 40 days = 50%

New credit period = 10 days x 50% + 40 days x 50% = 25 days