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Homework answers / question archive / Jenkins Supply Corporation sells $150 million of its products to wholesalers on terms of “net 50
Jenkins Supply Corporation sells $150 million of its products to wholesalers on terms of “net 50.” Currently, the firm’s average collection period is 60 days. In order to speed up the collection of receivables, Jenkins is considering offering a 1 percent cash discount if customers pay their bills within 19 days. The firm expects 50 percent of its customers to take the discount and its average collection period to decline to 55 days. The firm’s required pretax return on receivables investments is 10 percent. Determine the net effect on Jenkins’ pretax profits of offering a 1 percent cash discount. Assume there are 365 days per year. Round your answer to the nearest dollar. Enter your answer in whole dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.20. Use minus (-) sign for negative figure.
$
a. funds released = Sales * (Old Collection Days - New Collection Days) / 365
funds released = 150000000 * (60 - 55) / 365
funds released = $2054795
b. The net effect on Jenkins pretax profits = Earnings on Released Funds - Cost of Cash Discounts
The net effect on Jenkins pretax profits = 2054794.52 * 10% - 150000000 * 50% * 1%
The net effect on Jenkins pretax profits = - 544521
