SNC is considering an opportunity to add Atlantic Wellness, a large, successful health food chain as a new corporate customer for its herbal nutraceutical product line. Taking on this customer would immediately increase SNC's sales by $4 million per year (a one-time increase of 40%) and EBIT by $260,000. The profit margins and net working capital terms would remain the same as for SNC's existing business.
SNC is considering working with Nutrilife on a half-size contract for its herbal nutraceutical product line, with an incremental sales benefit to the top line of $2 million (a one-time 20% increase). In addition, Ayurveda Naturals, the India-based supplier of herbs for the Nutrilife contract, is offering very favorable payment terms: 2/30 net 60. In other words, SNC could lower its accounts payable liability to $153,000 by paying Ayurveda Naturals within 30 days, thereby realizing a 2% discount on raw materials.
SNC is considering evaluating the payment profile of its customer base, especially focusing on customers who are chronically delinquent in paying invoices. Super Sports Centers-a national, mall-based, upscale fitness network and a key SNC customer (accounting for 20% of SNC's overall sales)-routinely takes almost 200 days to pay its invoices. That far exceeds the 90-day average collection period for SNC's other customers. If SNC drops Super Sports Centers from its customer base, sales will decrease by $2 million. However, the cash-flow measure of days sales outstanding (DSO) will quickly improve.
Sunflower Nutraceuticals is planning to review the order frequency of individual products through stock-keeping units (SKUs) over the last 12 months. Although Sunflower carries over 100 different SKUs, certain types of products -such as vitamins for specific life stages, less popular herbs, and other products -are not everyday purchases for most consumers, so those items take up space in the physical inventory but have a low turnover. If Sunflower eliminates these slower-moving items from the inventory, the companys sales will decrease by $1 million and EBIT will decrease by $65,000. Reducing the size of Sunflowers overall product offerings will lower the Days Sales of Inventory (DSI) to a more desirable 86 days. These changes are reflected in the assumptions provided below.
Which option is the best and why?