Ch 22 Mini Case Essay

903 words - 4 pages

| Jen Poe | | | | | |
| BUS657 Corporate Managerial Finance | | | | |
| | | | | | |
| Week #5 | | | | | |
| Assignment - Chapter 22 Mini - Case | | | | |
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| | | | | | |
1)      Calculate BB's current cash conversion cycle. | | | | |
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| BB's Ratios: | | | | | |
| Average Age of Inventory | $842,020 / [(0.57 *$43,803,000) /365] | | 12.31 | days |
| Average Collection Period | $3,240,222/($43,803,000/365) | | 27.00 | days |
| Average payment Period | $1,826,070/[(0.57*$43,803,000)/365] | | 26.695 | days |
| | | | | | |
| BB's Cash Conversion Cycle = | AAI + ACP - APP ...view middle of the document...

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 sufficient excess capacity to handle the increase) as well as an increase of three days in the average collection period. They also expect 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? | |
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| Current: | | | | | |
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| Additional profit from sales = change in sales * contribution margin | | | |
| = (.038 * $43,803,000)($1.5 - $0.5126) = | $ 1,643,541.12 | | | |
| | | | | | |
| Cost of marginal investment in Accounts Receivable: | | | | |
| Total Variable Costs of annual sales = $43,803,000÷$1.5 * $0.5126 = | $ 14,968,945.20 | | |
| Turnover of Accounts Receivable = 365÷27 = | 13.52 | | | |
| AIARcurrent = $14,968,945÷ 13.52 = | $ 1,107,170.49 | | | |
| | | | | | |
| Proposed: | | | | | |
| | | | | | |
| Additional profit from sales = change in sales * contribution margin | | | |
| = (.038 * $43,803,000)($1.5 - $0.5126) = | $ 1,643,541.12 | | | |
| | | | | | |
| Cost of marginal investment in Accounts Receivable: | | | | |
| Total Variable Costs of annual sales = ($43,803,000*1.038)÷$1.5 * $0.5126 = | $ 15,537,765.12 | | |
| Turnover of Accounts Receivable = 365÷(27+3) = | 12.17 | | | |
| AIARproposed = $15,537,765÷ 12.17 = | $ 1,276,726.79 | | | |
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| Cost of marginal investment in Accounts Receivable: | | | | |
| Additional investment * required return = ($1,276,727 - $1,107,170) * .13 = | $ 22,042.32 | | |
| | | | | | |
| Cost of marginal bad debt expense: | | | | |
| Bad debt expenseproposed = (Salesproposed * %Bad debtsproposed) | | | |
| $43,803,000*1.038 * 0.005 = | $ 227,337.57 | | | | |
| | | | | | |
| Bad debt expensecurrent = 0 | | | | | |
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| Marginal = $227,338 - $0 = | $ 227,337.57 | | | | |
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| Net profit for the credit decision: | | | | | |
| | | | | | |
| $1,643,541 - $22,042 - $227,338 = | $ 1,394,161.23 | | | |
| | | | | | |
| | | ...

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