Bailey Distributing Company: Current Credit Policy

DATA
Company: Bailey Distributing Company

Current Credit Policy
1/10, net 30
40% of customers under discount
$200,000 annual sales
20,000 units, annual sales

New Credit Policy
3/10, net 50
50% of customers under discount
$250,000 annual sales
25,000 units, annual sales

Ordering Cost: $100/ order
Carrying Cost: $1/ units
Average Cost: $6, 50/ unit
Average Inventory: EOQ/2

Cost of Goods Sold= 65% of Net Sales
General and Administrative Expenses= 10% of Net Sales
Interest on Increase in Accounts Receivable and Inventory= 12%
Taxes= 25% of Before- Tax Income

QUESTIONS

a. Compute the accounts receivable balance before and after the change in the cash discount policy. Use the net sales (total sales2cash discounts) to determine the
S= total sales in units
O= ordering cost for each order
C= carrying cost per unit in dollars

- Current Credit Policy

S= 20,000 units
O= $100/order
C= $1/ unit

Average Inventory in units= EOQ/2= 1,000 units [1]
Average Cost: $6, 50/ unit [2]

[1],[2] Average Inventory in Dollars= 1,000 units* $6,50 = $6,500

- New Credit Policy

S= 25,000 units
O= $100/order
C= $1/ unit

[Calculations will be based on the assumption that EOQ is equal to 2,236]
Average Inventory in units= EOQ/2= 1,118 units [1]
Average Cost: $6, 50/ unit [2]

[1],[2] Average Inventory in Dollars= 1,118 units* $6,50 = $7,267

Answer to question c
Current Credit Policy
Cost of goods sold= $129.480
General and administrative expenses= $19,920
Interest on increase in accounts receivables 12%=
(20.520,9-5533,3)*12%= $1.798,5
Interest on increase in inventory balance 12%=
(14.534-13.000)*12%=$184.08

New Credit Policy
Cost of goods sold= $160.062, 50
General and administrative expenses= $24.625
Interest on increase in accounts receivables 12%=
(20.520,9-5533,3)*12%= $1.798,5
Interest on increase in inventory balance 12%=
(14.534-13.000)*12%=$184.08

Answer to question