Assignment: Receivables and Inventory Policy
Bailey Company sells small appliances to hardware stores in the southern California Area. Michael Bailey, the president of the company is thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/10, net 30 and the new policy would call for a 3/10, net 50. Currently 40% of Bailey customers are taking the discount, and it is anticipated that this number would go up to 50 % with the new policy. It is further anticipated that the annual sales would increase form a level 0f $200,000 to $250,000 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 Bailey is based on a determination of an EOQ. Assume unit sales of small appliances will increase from $20,000 to $25,000 units. The ordering cost for each order is $100 and the carrying cost per unit is $1 (these values will not change with the discount). The average inventory is based on EOQ/2. Each unit in inventory has an average cost of $6.50.
Cost of goods sold is equal to 65% of net sales; general and administrative expenses are 10 % of net sales; and interest payments of 12% will be necessary only for the increase in the accts. receivable and inventory balances. Taxes will equal 25 % of before tax income
Question 1: Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (total sales - cash discounts) to determine the average daily sales and the accounts receivable balances.
Question 2: Determine 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.
Question 3: Complete a before and after income statement including: Net sales, COGS, Gross profit, general and administrative expense, operating profit, Interest on increase in accts rec. and inventory (12%), Income before taxes, Taxes, Income after taxes.