Question Details

81. You are currently selling 72 units a month at a price of $210 a unit. Your variable cost of each unit is $130. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month. The monthly interest rate is 1.5 percent. What is the net present value of this proposed switch using the accounts receivable approach? 
A. $104,557
B. $114,829
C. $134,822
D. $136,516
E. $141,520

82. Your current sales consist of 27 units per month at a price of $225 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit. If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate. The monthly interest rate is 1.5 percent. What is the net present value of the proposed credit policy switch? 
A. $6,727
B. $6,893
C. $7,206
D. $7,965
E. $8,481

83. Your current sales consist of 45 units per month at a price of $390 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even default rate of the proposed switch? 
A. 3.55 percent
B. 3.68 percent
C. 4.29 percent
D. 4.71 percent
E. 4.88 percent

Essay Questions
 

84. Which do you feel is the more appropriate upper limit for the credit period that a seller offers to a buyer: the buyer's operating cycle or the buyer's inventory period? 

85. Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail chain consistently takes the 2 percent discount and pays in 60 days. When pressed on the issue, the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business. Is this ethical? How might this impact a small supplier versus a large supplier? Explain. 

86. Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts? 

87. All else equal, firms with (1) excess capacity, (2) low variable costs, and (3) repeat customers are more apt to offer liberal credit terms to their customers than are other firms. Explain why this tendency exists. 

Multiple Choice Questions
 

88. The Green Hornet sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,600 forecasts every month at a price of $1,100 each. What is the firm's average balance sheet amount in accounts receivable? 
A. $940,274
B. $1,408,272
C. $1,786,521
D. $1,811,012
E. $1,915,387

89. A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn when a customer does not take the discount? 
A. 18.67 percent
B. 20.45 percent
C. 23.37 percent
D. 25.34 percent
E. 25.92 percent

90. Music City, Inc. has an average collection period of 56 days. Its average daily investment in receivables is $50,000. What are the annual credit sales? 
A. $268,407
B. $307,109
C. $325,893
D. $728,215
E. $767,123