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Unformatted text preview: , what additional savings in resource investment
costs will result from the shortened cash conversion cycle, assuming that
the level of sales remains constant?
(2) If the firm’s sales (all on credit) are $40,000,000 and 45% of the customers are expected to take the cash discount, by how much will the
firm’s annual revenues be reduced as a result of the discount?
(3) If the firm’s variable cost of the $40,000,000 in sales is 80%, determine
the reduction in the average investment in accounts receivable and the 669 annual savings that will result from this reduced investment, assuming
that sales remain constant. (Assume a 360-day year.)
(4) If the firm’s bad-debt expenses decline from 2% to 1.5% of sales, what
annual savings will result, assuming that sales remain constant?
(5) Use your findings in parts (2) through (4) to assess whether offering the
cash discount can be justified financially. Explain why or why not.
e. On the basis of your analysis in parts a through d, what recommendations
would you offer Teresa Leal?
f. Review for Teresa Leal the key sources of short-term financing, other than
accounts payable, that she may consider in order to finance Casa de
Diseño’s resource investment need calculated in part b. Be sure to mention
both unsecured and secured sources. 670...
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