Reference no: EM132924464
Problem - Your first major assignment after your recent promotion at Ice Nine involves overseeing the management of accounts receivable and inventory. The first item that you must attend to is a proposed change in credit policy that would relax credit terms from the existing 1/50, net 70 to 2/60, net 90 in hopes of securing new sales. The management at Ice Nine does not expect bad-debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem:
To help the firm in reaching a decision on whether to relax its credit terms, you have been asked to respond to the following questions:
a. What determines the size of the investment Ice Nine makes in accounts receivable?
b. If a firm currently buys from Ice Nine under the present trade credit terms of 1/50, net 70 and decides to forego the trade credit discount and pay on the net day, what is the annualized cost to that firm of foregoing the discount?
c. If Ice Nine changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Ice Nine and decides to forego the trade credit discount and pay on the net day?
d. What is the estimated change in profits resulting from the increased sales less any additional bad debts associated with the proposed change in credit policy?
e. Estimate the cost of the additional investment in accounts receivable and inventory associated with this change in credit policy.
f. Estimate the change in the cost of the cash discount if the proposed change in the credit policy is enacted.
g. Compare the incremental revenues with the incremental costs. Should the proposed change be enacted?
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