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- San Diego State University
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- Finance 323
- Pawar
- Test #3 Accounts Receivable Management

nick b.

2/10, n/30 →2/10, net 30

- The customer has 30 days to pay the full invoice amount
- Offered a 2% discount if he pays the invoice within 10 days

Cost to customer for forgoing the discount =

[Cash Discount / (100% - Cash Discount)] x (365 / N)

N = number of days the payment can be delayed by giving up the cash discount

N = number of days the payment can be delayed by giving up the cash discount

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2/10 n/30 → calculate cost of forgoing discount

.02 / (1.0 – .02) x 365 / 20 = 37.24%

30 - 10 = 20

30 - 10 = 20

Calculating Credit Terms: Changing the Credit Terms

- Calculate the contribution of profit
- Calculate the marginal cost of investing in accounts receivable and inventory
- Calculate the marginal cost of the cash discount
- Calculate the marginal cost of bad debts
- Calculate the Benefit

Contribution Profit =

Additional Sales x Contribution Margin

Marginal Cost of investing in A/R and Inventory

= sales x ACP/360

Subtract the two Investment In A/R to get marginal

Add the**Marginal Investment in Inventory** (Given in problem) to the difference

Subtract the two Investment In A/R to get marginal

Add the

Marginal Cost =

(Marginal Cost of investing in A/R and Inventory) x (Required return on investment)

Required Rate of Return also

opportunity cost

marginal Cost of the cash discount =

sales x discount rate x customers taking discount

Subtract the difference to get marginal

Subtract the difference to get marginal

Marginal Cost of Bad Debts =

Additional sales x Rate of increased bad debt

Calculate Net Benefit

Contribution to Profit

- Marginal Cost of investing in accounts receivable and inventory

-Marginal Cost of cash discount

-Marginal Cost of Bad Debts

- Marginal Cost of investing in accounts receivable and inventory

-Marginal Cost of cash discount

-Marginal Cost of Bad Debts

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