1. Forrester Fashions has annual credit sales of 250,000 units with an average c

Question

1.       Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a per unit sale price of $30. Bad debts currently are 5% of sales. The form estimates that a proposed relaxation of credit standards would not affect its 70 day average collection period but would increase bad debts to 7.5% of sales, which would increase to 300,000 units per year. Forrester requires a 12% return on investments. Show all necessary calculations required to evaluate Forrester

Explanation / Answer

1.

Existing New
Sales revenue (250000 x 30) = 7500000 9000000
Variable cost (250000 x 20) = -5000000 6000000
Contribution 2500000 3000000
Bad debts -375000 -675000
Interest -175000 -210000
Total 1950000 2115000
As the new proposed policy has increased the profit of the firm it should beaccepted.

2.

Increase in CM = 2000*40-29 = 22000
Less discount
37000*40*.8*.02 = = 23680
Net loss = = 1680
The loss to be covered by reducing the account receivable investment which should be 1680/.15 = 11200
AT present the Account receivable = 35000*40/365*65 = 249315
Less decrease required =-11200
The new Account receivable should be =238115
Average collection period should be = 365/1480000/238115 = 58.72 or 59 days.

3.

minimum peak requirement
Cash = 35000 -10000 = 25000
Inventory = 125000 - 55000 = 70000
a/r = 70000 - 40000 = 30000
a/p = 65000 - 35000 = 30000

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