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collections and thereby improve the firm’s cash flows. Eboy would
like to increase its accounts receivable turnover to 12.0.
The firm works with a raw material whose current annual usage is
1,450 units. Each finished product requires one unit of this raw
material at a variable cost of $2,600 per unit and sells for $4,200 on
terms of net 30. It is estimated that 70% of the firm’s customers will
take the 2% cash discount and that, with the discount, sales of the
finished product will increase by 50 units per year. The firm’s
opportunity cost of funds invested in accounts receivable is 12.5%.
In analyzing the investment in accounts receivable, use the variable
cost of the product sold instead of the sale price because the variable
cost is a better indicator of the firm’s investment.
TO DO
Create a spreadsheet similar to Table 15.3 to analyze whether the
firm should initiate the proposed cash discount. What is your advice?
Make sure that you calculate the following:
·
a. Additional profit contribution from sales.
·
b. Average investment in accounts receivable at present
(without cash discount).
·
c. Average investment in accounts receivable with the
proposed cash discount.
·
d. Reduction in investment in accounts receivable.
·
e. Cost savings from reduced investment in accounts
receivable.
·
f. Cost of the cash discount.
·
g. Net profit (loss) from initiation of proposed cash discount.
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FIN 486 Week 5 Individual Assignment Final

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FIN 486 Week 5 Individual Assignment Final