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Chapter 3: 1DQ (page 247)
Under what circumstances would it be advisable to borrow money to take a cash discount?
The buyer can borrow money for taking advantage of the cash discount when the cost of borrowing is less than the amount of cash discount provided to the buyer.
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Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales:
January | \(65,000 |
February | \)55,000 |
March | \(100,000 |
April | \)45,000 |
Sales in December of the prior year were $75,000. Prepare a cash receipts schedule for January through April.
How have new banking laws influenced competition?
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.
c. Should Henderson liberalize credit if a 16 percent after-tax return on investment is required?
Esquire Products Inc. expects the following monthly sales:
January | \(28,000 |
February | \)19,000 |
March | \(12,000 |
April | \)14,000 |
May | \(8,000 |
June | \)6,000 |
July | \(22,000 |
August | \)26,000 |
September | \(29,000 |
October | \)34,000 |
November | \(42,000 |
December | \)24,000 |
Total annual sales | \(264,000 |
Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.
c. Determine a cash payments schedule for January through December. The production costs (\)1 per unit produced) are paid for in the month in which they occur. Other cash payments (besides those for production costs) are $7,400 per month.
What is the significance to working capital management of matching sales and production?
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