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    Assignment 2 - Final Period

    Uploaded by

    Joelyn Fajiculay

    Copyright:

    © All Rights Reserved
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    Assignment 2 - Final Period

    Uploaded by

    Joelyn Fajiculay
    3 views3 pages

    Original Title

    ASSIGNMENT 2 - FINAL PERIOD

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    © © All Rights Reserved

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    3 views3 pages

    Assignment 2 - Final Period

    Uploaded by

    Joelyn Fajiculay

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    For items 1-6:

    Sarah Company is considering a plan to ease its credit terms in order to generate greater
    revenues. Last year, Sarah Co sold 2,000,000 units at a price of P20 and variable cost of
    P15. Its current average collection period is 20 days, and its percentage of bad debt
    expense is 2%, while its required return on investment is 10%. If Sarah Co will ease its
    credit terms, the firms anticipates that its sales will increase to 2,500,000 units without a
    change in price or variable cost. However, the average collection period is expected to
    increase to 30 days and bad debt expense to increase to 3%. Assume 360 days in a year.

    Answer:

    Current Sales Expected Sales Difference


    Sales 40,000,000 50,000,000 10,000,000
    Less: Variable Cost 15% 6,000,000 7,500,000 1,500,000
    Contribution Margin 34,000,000 42,500,000 8,500,000
    Less: Bad Debts 800,000 1,500,000 700,000
    Expenses
    Net Income ₱ 33,200,000 ₱ 41,000,000 ₱ 7,800,000

    1. What is the current average investment in Accounts Receivable?

    Sales = Unit sold × Price

    = 2,000,000 × 20

    Sales = ₱ 40,000,000

    Ave. Investment in Accounts Receivable = Sales × Ave. Collection Period ÷ 360

    = 40,000,000 × 20 ÷ 360

    = 800,000,000 ÷ 360

    Ave. Investment in Accounts Receivable = ₱ 2,222,222.22

    2. What is Sara's expected increase in bad debts expense?


    Expected Increase in Bad Debt Expense = Expected Bad Debt Expense –
    Current
    Bad Debts Expense
    = (2,500,000 × 20 × 3%) – (2,000,000 ×
    20 × 2%)
    = 1,500,000 – 800,000
    Expected Increase in Bad Debt Expense = ₱ 700,000

    3. What is the opportunity cost in the increased accounts receivable?

    Proposed Average Investment (2,500,000 × 15 × 30 ÷ 360) = ₱ 3,125,000


    Present Average Investment (2,000,000 × 15 × 20 ÷ 360) 1,666,667
    Marginal Investment of Accounts Receivable 1,458,333
    Required Return on Investment × 10
    Cost of Investment ₱ 145,833

    4. What is future average investment in Accounts Receivable?

    Sales = Unit sold × Price


    = 2,500,000 × 20
    Sales = ₱ 50,000,000

    Future Ave. Investment in Accounts Receivable = Sales × Ave. Collection Period


    ÷ 360
    = 50,000,000 × 30 ÷ 360
    = 1,500,000,000 ÷ 360
    Future Ave. Investment in Accounts Receivable = ₱ 4,166,666.67

    5. What is the marginal profit from increased sales?

    Marginal Profit = ₱ 10,000,000 - ₱ 7,500,000


    Marginal Profit = ₱ 2,500,000

    6. What is the net profit for the credit decision at hand?

    Net Profit = ₱ 2,500,000 - ₱ 145,833 - ₱ 700,000


    Net Profit = ₱ 1,654,167

    For items 7-9:

    A company's accounts receivable amount to P150,000. Receivable turnover is 10X and


    inventory is maintained at a level equal to 15 days sales. The selling price is P100/item and
    a gross profit ratio of 40%. A proposal has been made to change the credit term to n/60
    which will result in an increase in sales volume by 1/3 or by 5,000 units. Under this
    proposal, bad debts losses are estimated at 1 to 3% of sales but inventory turnover shall
    remain the same.

    7. How much is the the increased accounts receivable?

    Daily Credit Sales ₱ 150,000 ÷ 15 days = P10,000 ₱ 650,000 ÷ 15 days = ₱


    43,333.33
    ₱ 150,000 ÷ ₱ 100 = 1,500 1,500 units + 5,000 units = 6,500
    units units x ₱ 100 = ₱ 650,000
    Daily Sales Outstanding × 10 days × 60 days
    Accounts Receivable Balance ₱ 100,000 ₱ 2,599,999.80
    Increased in Account Receivable = ₱ 2,599,999.80 - ₱ 100,000 = ₱2,499,999.80

    8. How much is the increased inventory?

    Inventory before changing the ₱ 150,000 ÷ ₱ 100 ÷ 15 days ₱ 650,000 ÷ ₱ 100 ÷ 15 days
    Credit Term = 100 units = 433.33 units
    Increased in Inventory = 6,500 units – 1,500 units = 5,000 units ÷ 15 days = 333.33
    units

    9. Compute for the increased operating income.

    Operating Income Before ₱ 150,000 × 40% = ₱ 60,000


    Operating Income After ₱ 650,000 × 40% = ₱ 260,000
    Increased in Operating Income = ₱ 260,000 - ₱ 60,000 = ₱ 200,000

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