FM27 3 - -$ 5,635 $ 319,584 Taxes(40 130,088 2,254 127,834...

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SOLUTIONS TO END-OF-CHAPTER PROBLEMS 27-1 Analysis of change: Projected Income Projected Income Statement Effect of Statement Under Current Credit Policy Under New Credit Policy Change Credit Policy Gross sales $1,600,000 +$ 25,000 $1,625,000 Less: Discounts 0 0 0 Net sales $1,600,000 +$ 25,000 $1,625,000 Variable costs 1,200,000 + 18,750 1,218,750 Profit before credit costs and taxes $ 400,000 +$ 6,250 $ 406,250 Credit-related costs: Cost of carrying receivables* 15,781 + 8,260 24,041 Collection expense 35,000 - 13,000 22,000 Bad debt losses 24,000 + 16,625 40,625 Profit before taxes $ 325,219
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Unformatted text preview: -$ 5,635 $ 319,584 Taxes (40%) 130,088- 2,254 127,834 Net income $ 195,131-$ 3,381 $ 191,750 *Cost of carrying receivables: . ( ) ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ funds of Cost ratio cost Variable day per Sales DSO Current policy = (30) ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ 365 000 , 600 , 1 $ (0.75)(0.16) = $15,781. New policy = (45) ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ 365 000 , 625 , 1 $ (0.75)(0.16) = $24,041. Since the change in profitability is negative, the firm should not relax its collection efforts. Answers and Solutions: 27 - 3...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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