[glotim]

Alexander Distributing
Company sells small appliances to hardware stores in Northern Greece. Alexander Boskos, the president of the company, is thinking about the need to change credit policies offered by the firm in order to attract more customers away from their competitors. The current policy calls for a 1/10, net 30, and the new policy would call for a 3/10, net 50. Currently 40% of Alexander customers are taking the discount, and it is anticipated that this number would go up to 50% with the new discount policy. It is further anticipated that annual sales would increase from a level of $200,000 to $250,000 as a result of the change in the cash discount policy.

The increased sales would also affect the inventory level. The average inventory carried by Alexander is based on a determination of an EOQ. Assume unit sales of small appliances will increase from 20,000 to 25,000 units. The ordering costs for each order are $100 and the carrying cost per unit is $1. The average cost of inventory is $6.50

The cost of goods sold is equal to 65% of net sales; general and administrative expenses are 10% of net sales; and interest payments of 12% will be necessary only for the increase in the accounts receivables and inventory balances. The tax rate is 25%.

A. Compute the accounts receivable balance before and after in the cash discount policy.
B. Determine EOQ and average inventory before and after the change in the cash discount policy.
C. Complete the income statement below:

Policy Change Policy Change

Net Sales
Cost of Goods Sold
Gross Profit
General and Administrative
Expenses
Operating Profit
Interest on increase in
Accounts Receivables and
Inventory
Income before taxes
Income Tax Expense
Net Income

D. Compute the net income after taxes for the additional sales, as well as the return on increase of sales and the return on the increase of accounts receivables plus increase of inventory.
E. Should the new cash discount policy be used?