Question

Garcia Industries has sales of $187,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed up by this change, how would that affect its net income, assuming other things are held constant? Assume all sales to be on credit. Do not round your intermediate calculations. A. $333.37 B. $311.15 C. $370.41 D. $422.27 E. $459.31

Answer 1

Answer:

Additional net income will be $370.248

So option c is correct option

Explanation:

We have given rate of return on cash generated 8.0%

Total sales $187500

Account receivable = $18500

Days in Year 365

Sales per day = $=\frac{187500}{365}= 513.698$

Company DSO = $=\frac{account\ receivable}{sales\ per\ day}=\frac{ 18500}{513.698}=36.01$

Industry DSO = 27 days

Difference = Company DSO – Industry DSO = 36.01-27 = 9.01

Cash flow from reducing the DSO = Difference × Sales per day = 9.01×513.698 = 4628.1

Additional Net Income = Return on cash × Added cash flow = 0.08×4628.1 = 370.248

So option (c) will be correct option