Company: Bailey Distributing Company
Current Credit Policy
1/10, net 30
40% of customers under discount
$200,000 annual sales
20,000 units, annual sales
New Credit Policy
3/10, net 50
50% of customers under discount
$250,000 annual sales
25,000 units, annual sales
Ordering Cost: $100/ order
Carrying Cost: $1/ units
Average Cost: $6, 50/ unit
Average Inventory: EOQ/2
Cost of Goods Sold= 65% of Net Sales
General and Administrative Expenses= 10% of Net Sales
Interest on Increase in Accounts Receivable and Inventory= 12%
Taxes= 25% of Before- Tax Income
QUESTIONS
a. Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (total sales2cash discounts) to determine the …show more content…
S= total sales in units
O= ordering cost for each order
C= carrying cost per unit in dollars
- Current Credit Policy
S= 20,000 units
O= $100/order
C= $1/ unit
Average Inventory in units= EOQ/2= 1,000 units [1]
Average Cost: $6, 50/ unit [2]
[1],[2] Average Inventory in Dollars= 1,000 units* $6,50 = $6,500
- New Credit Policy
S= 25,000 units
O= $100/order
C= $1/ unit
[Calculations will be based on the assumption that EOQ is equal to 2,236]
Average Inventory in units= EOQ/2= 1,118 units [1]
Average Cost: $6, 50/ unit [2]
[1],[2] Average Inventory in Dollars= 1,118 units* $6,50 = $7,267
Answer to question c
Current Credit Policy
Cost of goods sold= $129.480
General and administrative expenses= $19,920
Interest on increase in accounts receivables 12%=
(20.520,9-5533,3)*12%= $1.798,5
Interest on increase in inventory balance 12%=
(14.534-13.000)*12%=$184.08
New Credit Policy
Cost of goods sold= $160.062, 50
General and administrative expenses= $24.625
Interest on increase in accounts receivables 12%=
(20.520,9-5533,3)*12%= $1.798,5
Interest on increase in inventory balance 12%=
(14.534-13.000)*12%=$184.08
Answer to question