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standards for payables and inventory, the firm can reduce the average
collection period by offering credit terms of 3/10 net 60, what
additional savings in resource investment costs will result from the
shortened cash conversion cycle, assuming that the level of sales
remains constant? (2) If the firm’s sales (all on credit) are
$40,000,000 and 45% of the customers are expected to take the cash
discount, by how much will the firm’s annual revenues be reduced as
a result of the discount? (3) If the firm’s variables cost of the
$40,000,000 in sales is 80%, determine the reduction in the average
investment in accounts receivable and the annual savings that will
result from this reduced investment, assuming that sales remain
constant. (4) If the firm’s bad-debts expenses decline from 2% to
1.5% of sales, what annual savings will result, assuming that sales
remain constant? (5) Use your findings in parts (2) through (4) to
assess whether offering the cash discount can be justified financially.
Explain why or why not. E. On the basis of your analysis in parts a
through d, what recommendations would you offer Teresa Leal? F.
Review for Teresa Leal the key sources of short-term financing, an
account payable, that she may consider for financing Casa de
Diseno’s resource investment need calculated in part b. Be sure to
mention both unsecured and secured sources.
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