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    Bryent Gaw
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    This document contains calculations and analyses related to reducing float time and bad debts for two companies. For the first company, implementing a lockbox system that reduces float from 8 to 5 days would decrease cash balances by 660,000, earning interest of 66,000 annually. The maximum monthly charge should be 5,500. For the second company, Goldston & Co, implementing a more restrictive credit policy that reduces sales by 8% but bad debts from 6% to 2.6% would increase annual operating income by over 1 million and should be adopted, but not if bad debts only fall to 4%.

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    This document contains calculations and analyses related to reducing float time and bad debts for two companies. For the first company, implementing a lockbox system that reduces float from 8 to 5 days would decrease cash balances by 660,000, earning interest of 66,000 annually. The maximum monthly charge should be 5,500. For the second company, Goldston & Co, implementing a more restrictive credit policy that reduces sales by 8% but bad debts from 6% to 2.6% would increase annual operating income by over 1 million and should be adopted, but not if bad debts only fall to 4%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    1K views2 pages

    Working Caps

    Uploaded by

    Bryent Gaw
    This document contains calculations and analyses related to reducing float time and bad debts for two companies. For the first company, implementing a lockbox system that reduces float from 8 to 5 days would decrease cash balances by 660,000, earning interest of 66,000 annually. The maximum monthly charge should be 5,500. For the second company, Goldston & Co, implementing a more restrictive credit policy that reduces sales by 8% but bad debts from 6% to 2.6% would increase annual operating income by over 1 million and should be adopted, but not if bad debts only fall to 4%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 2

    I. A firm has daily cash receipts of P100,000 and collection time of 2 days.

    A bank has offered to decrease the collection time on the


    firm’s deposits by two days for a monthly fee of P500.

    12. If money market rates are expected to average 6% during the year, the net annual benefit loss) from having this service is

    100,000 × 2 days = 200,000

    Benefit (loss) = Interest earned – Cost

    = (200,000 × 6%) –(500 × 12 months)

    = 12,000 –6,000

    = P6,000

    J. It typically takes Nexus Inc. 8 days to receive and deposit customer remissions. Nexus is considering a lockbox system and anticipates
    that the system will reduce the float time to 5 days. Average daily cash receipts are P220,000. The rate of return is 10 percent.

    13. What is the reduction in cash balances associated with implementing the system?

    The reduction in outstanding cash balances arising from implementing the lockbox system is:

    3 days x 220,000 = 660,000

    14. What is the rate of return associated with the earlier receipt of the funds?

    The return that could be earned on these funds is:

    660,000 x 0.10 = 66,000

     
    15. What should be the maximum monthly charge associated with the lockbox proposal?

    The maximum monthly charge the company should pay for this lockbox arrangement is therefore:

    66,000/12 = 5,500

    K. Proxy Company turns out 200 flash drives a day at a cost of P300 per drive for materials and variable conversion cost. It takes the
    firm 18 days to convert raw materials into flash drives. Proxie’s usual credit terms extended to its customers is 30 days, and the firm
    generally pays its suppliers in 20 days.

    16. If the foregoing cycles are constant, what amount of working capital must Proxy Company finance?

    Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance.

    200 x 300 = 60,000 x 365 = 21,900,000


    18/365 = .049

    21,900,000 x .049 = P1,080,000

    V. Over the past few years, the marketing department at Goldston & Co has convinced the finance department to permit credit sales to
    increasingly marginal customers. Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested that credit
    policy be tightened to reduce bad debt losses. Their proposal calls for a more restrictive policy under which sales would fall by 8% but
    bad debt losses would drop to 2.6% of revenue. Under the current policy Golston’s revenue forecast is $400 million with a contribution
    margin of 38%. Implementing the new credit policy wouldn’t have an effect on contribution margin but would require an additional
    $500,000 in annual fixed costs.
    27.) Should Goldston implement finance’s new credit policy?

    Current Policy New Policy

    Cash from sales 400M x .94 = 376M Cash from sales 400M x .974 x .92 = 358,432,000
    Corporate Expenses 400M x .62 = 248M Corporate Expense 400M x .62 x .92 = 228,160,000
    Contribution Margin 128M Contribution Margin 130,272,000
    Fixed Cost 0 Fixed Cost 500,000
    Operating Income 128M Operating Income 129,772,000

    With higher Operating Income, the new policy should be implemented.

    28.) Should the new policy be implemented if bad debts only are only expected to drop to 4% of revenues?

    Cash from sales 400M x .96 x .92 = 353,280,000


    Corporate Expense 400M x .62 x .92 = 228,160,000
    Contribution Margin 125,120,000
    Fixed Cost 500,000
    Operating Income 124,620,000

    With a lower Operating Income, the new policy shouldn’t be implemented

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