DYL PICKLE CURRENT SITUATION FOR DYL PICKLE COMPANY: S o = Current sales = $15 million. V = Variable costs as a % of sales = 70% = 0. 1 - V =...

DYL PICKLE

CURRENT SITUATION FOR DYL PICKLE COMPANY:

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 - V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

Do = Discount percentage = 0%.

DYL IS ANALYZING THESE POTENTIAL CREDIT POLICY CHANGES:

1.   Relax credit standards. Expected effects:

         DS = Incremental sales - $1 million

         Bn = Bad debt losses on new sales (only) = %5

         ACPn = ACP on new sales (only) = 45 days

2.             As alternative to the above changes, lengthen credit period such that ACP = 45 days. DS = $1 million; Bn = 5% on DS. (Bo = 3% on So.)

3.             Shorten credit period to 20 days. DS = -$1 million. Bo will decline from 3% to 2% (on all sales).

4.             Allow a 2% discount for payment within 10 days (i.e., 2/10, net 30). 40% of customers will take discounts; Bo will decline to 2% (on all sales); and DS = $1 million.

5.             Toughen up on collection policy. New ACP will be 25 days. DS = -$1 million. Bo will go from 3% to 1%.

___________________________________________________________________________________________________________________________

This is question 4 modified to include an existing discount.

CURRENT SITUATION FOR DYL PICKLE COMPANY:

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 - V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

Do = Discount percentage = 1%. (1/10 net 30)

Probability of taking old discount = 20%

Actual credit period for those not taking discount = 40 days

1. What is the existing (old) actual credit period? (remember this is a weighted average calculation)

2. It is proposed that the company offer a new discount of 2/10 net 30. It is expected that 40% of customers will take the discount. It is assumed that the actual credit period for those not taking the discount is 40 days.

What is the new actual credit period?

3. What is the total change in investment? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

4. What is the total change in profits if we assume the bad debt percentage drops to 2% for all sales? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

5. What is the NPV of this proposed change? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)