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Unformatted text preview: $53,000.
Next, Arlene studied the production cycle and inventory policies. The average age of inventory was 120 days. She determined that the industry standard as
reported in a survey done by Publishing World, the trade association journal,
was 85 days. She estimated the annual cost of achieving an 85-day average age
of inventory to be $150,000.
Further analysis showed Arlene that the firm’s average collection period was
60 days. The industry average, derived from the trade association data and information on three similar publishing companies, was found to be 42 days—30%
lower than Roche’s. Arlene estimated that if Roche initiated a 2% cash discount
for payment within 10 days of the beginning of the credit period, the firm’s average collection period would drop from 60 days to the 42-day industry average.
She also expected the following to occur as a result of the discount: Annual sales
would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and the 2% cash discount would be applied to 75% of the firm...
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