Finance
Bracelet Blanks, Inc. (BB) generated $43,803,000 in sales (all on credit) during 2010. The cost of goods sold was 57% of that total. Accounts receivable totaled $3,240,222, inventory totaled $842,020, and accounts payable totaled $1,826,070.
Revenue 43803000
COGS 24967710
INV 842020
DIO 84050/(24967710/365) = 84050/68404 = 1.23
DSP 324020/(43803000/365) = 3240222/123042 = 26.3
DPO 186070/(24967710/365) = 186070/68405 = 2.7
Calculate BB’s current cash conversion cycle.
CCC = DIO + DSO — DPO CCC 1.23 + 26.3 — 2.7 = 24.83
BB currently uses 3,000 ingots of aluminum each year to . The order cost (including shipping) is $5,000 per order, and carrying costs are $75 per unit per year. Determine the economic order quantity, the amount of safety stock, and the reorder point for aluminum ingots assuming there is a 1-week lead time and the firm would like a safety stock of 3%.
Sqr 2 * 3000 * 5000 / 75 = 362.5
c. In an attempt to boost sales, BB is considering relaxing its credit standards by extending more credit to small firms. BB charges $1.50 per unit. Variable costs are $0.5126 per unit and fixed costs are $10,000,000 per year. The relaxation of credit standards is expected to result in a 3.8% increase in sales (the firm has to handle the increase) as well as an increase of three days in the average collection period. They also expect to bad debts to rise from the current level of 0% to 0.5% of sales. Assuming that BB requires a 13% return on investments of this type, should the firm relax its credit standards? Explain.
Yes, the company should relax its credit standards. The marginal costs are far less than the dollar per unit collected. The company is getting a gross margin of roughly two hundred percent on each additional good sold. Furthermore the almost four percent increases in sales only cost half a point in bad debt. Although the collection time is slightly delayed, the additional margin justifies this delay.
d. Additionally, BB offers its credit customers terms of net 30. However, it is considering changing the terms to 20/10 net 30 in an attempt to reduce the amount of time it takes to collect its accounts receivable. The firm believes this change alone would decrease the average collection period by five days. BB also expects that 63% of its customers will elect to pay within the discount period and that the increased attractiveness of the terms will increase sales by 1% a year. It is not expected that bad debts will change from the current level of 0% as a result of this change in terms. BB’s opportunity cost of funds invested in accounts receivable is 10%. Should the firm offer the cash discount? Explain. Evaluate this scenario separately from the one described in question 3
Saving five days of the average collection period is not worth 10% discount for a ten day credit offer. However, since the opportunity cost of AR is also ten percent then this changes things. The company can invest this money that is collected early and breakeven. Further, with the increase in sales, the company will be benefiting by offering the new credit terms.
