Response to the following problem:
The Teeny Tiny Toy Company (often referred to as the 3T Company) manufactures toys with themes tied to recent movie releases. 3T's sales in the last fiscal year were $3 billion and sales have been growing at a rate of 5% per year. Sales are seasonal, with the peak sales in August of each year. 3T's fiscal year ends in January. The forecasted sales for 3T for the next fiscal year, in millions, are :
|
Month
|
Estimated Sales
|
Month
|
Estimated Sales
|
|
February
|
$150
|
August
|
$450
|
|
March
|
160
|
September
|
370
|
|
April
|
170
|
October
|
320
|
|
May
|
230
|
November
|
300
|
|
June
|
250
|
December
|
230
|
|
July
|
380
|
January
|
140
|
Sales for December and January of the most recent fiscal year are $215 million and $130 million, respectively. 3T's gross and contribution margins were 30% and 40%, respectively, in the last fiscal year. No change in margins is expected in the next fiscal year. 3T sells its goods to retail stores on credit, with terms of 4/30, net 90. Under the present credit terms, 30% of its customers pay within 30 days, 60% pay within 60 days, and the rest pay within 90 days. 3T is considering changing its credit policy to stimulate sales. Based an examination of competitors' terms, if they alter the policy to 4/60, net 90, 3T management anticipates increasing sales by 10%, but collections are expected to slow down: Only 10% of its sales on credit will be paid within 30 days, 80% paid within 60 days, and the rest paid within 90 days. The costs of administering and collecting accounts receivables is expected to increase by $200,000 since the customer base will be increased and credit will be extended to slower-paying customers. The cost of carrying accounts receivable (that is, the opportunity cost) is 10%.
a. Estimate the effect that the change in the credit policy would have on monthly sales and accounts receivable. Graph monthly sales and accounts receivable for each month in the next fiscal year.
b. Prepare a recommendation regarding the change in the credit policy. Be sure to list any assumptions that are necessary and discuss the benefits and costs associated with a change in 3T's credit policy.