Working Capital Management – Credit Sales Over the last few years, specialty coffee shops have expanded in the east coas
Posted: Mon Nov 15, 2021 5:05 pm
Working Capital Management –
Credit Sales
Over the last few
years, specialty coffee shops have expanded in the east coast due
to the influence that the presence of Starbucks has had on coffee
trends. In an effort to boost sales, the credit department at
Silverston Coffee Merchants, a wholesaler of specialty imported
coffee beans, has approved credit sales to cafés that have not had
a long operating history. Silverston has enjoyed an
impressive growth in revenue to $400 million. However, bad
debt expense has increased from 3% to 6% of sales. Silverston knows
that not all the new cafes will survive, but as the competition
diminishes, the few remaining shops will have a dominant market
share and will be profitable.
The finance department would like to
adopt a new credit policy which would reduce credit sales,
resulting in an overall sales reduction of 8%, but a decrease in
bad debt expense to 2.6% of sales. The company has an operating
profit margin of 38%, before bad debt expense and other costs
associated with the credit policy. If it adopts the stricter
credit policy, the company’s average collection period would
decrease from 50 days to 40 days. The company’s financing rate of
6% will remain the same. Implementing the new credit policy would
require $500,000 in additional annual overhead costs.
Required:
Calculate the
following to support your recommendation:
Credit Sales
Over the last few
years, specialty coffee shops have expanded in the east coast due
to the influence that the presence of Starbucks has had on coffee
trends. In an effort to boost sales, the credit department at
Silverston Coffee Merchants, a wholesaler of specialty imported
coffee beans, has approved credit sales to cafés that have not had
a long operating history. Silverston has enjoyed an
impressive growth in revenue to $400 million. However, bad
debt expense has increased from 3% to 6% of sales. Silverston knows
that not all the new cafes will survive, but as the competition
diminishes, the few remaining shops will have a dominant market
share and will be profitable.
The finance department would like to
adopt a new credit policy which would reduce credit sales,
resulting in an overall sales reduction of 8%, but a decrease in
bad debt expense to 2.6% of sales. The company has an operating
profit margin of 38%, before bad debt expense and other costs
associated with the credit policy. If it adopts the stricter
credit policy, the company’s average collection period would
decrease from 50 days to 40 days. The company’s financing rate of
6% will remain the same. Implementing the new credit policy would
require $500,000 in additional annual overhead costs.
Required:
Calculate the
following to support your recommendation: