Maddox Resources has credit sales of $180,000 yearly with ...



Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay.

What is the average receivables balance? What is the receivables turnover?

|Sales/360 days = average daily sales |

|$180,000/360 = $500 |

|Accounts receivable balance = $500 x 30 days = $15,000 |

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|Receivable turnover = sales/receivables |

|= $180,000/$15,000 = 12x |

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|or |

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|360 days/30 = 12x |

If Maddox were to offer a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $180,000 for your calculation of receivables.

$500 x 10 days = $5,000 new receivable balance

If Maddox reduces its bank loans, which cost 12 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm?

Old receivables – new receivables with discount = Funds freed by discount

$15,000 – $5,000 = $10,000

Savings on loan = 12% x $10,000 = $ 1,200

Discount on sales = 2% x $180,000 = (3,600)

Net change in income from discount $(2,400)

No! Don't offer the discount since the income from reduced bank loans does not offset the loss on the discount.

Assume that the new trade terms of 2/10, net 30 will increase sales by 20 percent because the discount makes the Maddox price competitive. If Maddox earns 16 percent on sales before discounts, should it offer the discount? (Consider the same variables as you did for problems 20 through 23.)

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|New sales = $180,000 x 1.20 = $216,000 |

|Sales per day = $216,000/360 = $600 |

|Average receivables balance = $600 x 10 = $6,000 |

|Savings in interest cost ($15,000 – $6,000) x 12% = 1,080 |

|Increase profit on new sales |

|= 16% x $36,000* = $5,760 |

|Reduced profit because of discount |

|= 2% x $216,000 = (4,320) |

|Net change in income $2,520 |

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|Yes, offer the discount because total profit increases. |

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|*New Sales $36,000 = $216,000 – $180,000 |

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