FIN 486 Expect Success/uophelp.com FIN 486 Expect Success/uophelp.com | Page 43

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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