Logan Distribution Company (Math Problem Sample)
The order involved analyzing different options on working capital management and advising the company on the best alternative. For example, it involved obtaining the best rate of discount to offer to customers in order to optimally manage debt levels.source..
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.
* The accounts receivable balance before and after the change in cash discount is as follow.
Debtors taking discount
Debtors not taking discount
2/365Ã— (35%Ã—$500,000)= $958.90
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
EOQ in units
EOQ in dollars ( EOQ in unitsÃ— Cost per unit)
* Income Statement
Before Change in $
After change in $
Net sales (Sales-Discount)
Â Cost of good sold
Â Gross Profit
Â General administrative expense
Â Operating Profit
Â Interest on increase in accounts receivable and inventory (14%)
Â Income before taxes
Â Income after taxes
Before change= 3% Ã— $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= $28.77Ã—365/2= $5,250.53
After change= 5%Ã—$4219.18= $210.96
The above discount is after 4days. ...
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