BUSI 320 Comprehensive Problem 2
You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit.
Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $120,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 2% of incremental sales, and production and selling costs are projected to be 74% of sales. Your firm expects to pay a total of 40% of its income after expenses in taxes.
If the receivable turnover ratio is expected to be 3 to 1 and no other asset buildup is needed to serve the new customers…
Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 3 days.