Logan Distribution Company (Math Problem Sample)

Logan Distribution Company
The president is thinking of changing the firm's credit policy to attract more customers from competitors. The present policy calls for 2/10, net 30 cash discount. The new policy would call for a 4/10, net 50 cash discount. Currently, 35 percent of Logan customers are taking the discount, and it is anticipated that this number would go up to 55 percent with the new discount policy. It is further anticipated that annual sales would increase from a level of $500,000 to $700,000 as a result of the change in the cash discount policy.
The following is an evaluation of whether the adoption of the new policy is worth or not.
Answers
* The accounts receivable balance before and after the change in cash discount is as follow.

Debtors taking discount

Debtors not taking discount

Total debtors

Before change

2/365× (35%×$500,000)= $958.90

10/365×(65%×$500,000)= $8,904.11

$9,863.01

After change

4/365× (55%×$700,000)=$4219.18

10/365×(45%×$700,000)= $8,630.14

$12,849.32

Notes:
1 Before change debtors taking discount are 35% 0f total sales (35% of $500,000) while those not taking discount are 65% of total sales (65% of $500,000).
2 After change debtors taking discount are 55% 0f total sales (55% of $700,000) while those not taking discount are 45% of total sales (45% of $700,000).
3 To obtain the amount of debt, we dividend the number of days taken to pay by the number of days in the year and then we multiply the result by the annual sales,
4 I have assumed a 365 days year.
* Determining Economic Order Quantity before and after change ion ah discount policyEOQ= (2DS)/h , (Caplin &Leahy, 2010), also expressed as [2DS/h]1/2Where, D; Annual demand ( 16,000 and 23,500 units)
S; ordering cost ($ 260)
H; Holding cost/ carrying cost ($2.52)
Cost per unit $13

Before change

After change

EOQ in units

(16000×260/2.5)1/2= 1,290

(23,500×260/2.5)1/2= 1,563

EOQ in dollars ( EOQ in units× Cost per unit)

1290×$13= $16,770

1563×$13= 20,319




* Income Statement
 

Before Change in $

After change in $

Net sales (Sales-Discount)

 494,749.70

 

 680,749.90

 

 Cost of good sold

 (321,587.31)

 

 (442,487.44)

 

 Gross Profit

 173,162.39

 

 238,262.46

 

 General administrative expense

 (74,212.46)

 

 (102,112.49)

 

 Operating Profit

 98,949.93

 

 136,149.97

 

 Interest on increase in accounts receivable and inventory (14%)

 

 

( 14,068.08)

 

 Income before taxes

 98,949.93

 

 122,081.89

 

 Taxes

 (39,579.97)

 

 (48,832.76)

 

 Income after taxes

 59,369.96

 

 73,249.13

 

Notes
Cash discounts
Before change= 3% × $958.90= $28.77
The above discount is after 2 days, to compute discount for the whole year we then multiply it by 365 days and divide it two.
Total cash discount for the year= $28.77×365/2= $5,250.53
After change= 5%×$4219.18= $210.96
The above discount is after 4days. ...