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budget for the first six months of the coming year is as follows: All sales are made on credit
budget for the first six months of the coming year is as follows: All sales are made on credit.
|
January |
February |
March |
April |
May |
June |
|
|
Budgeted sales |
$540,000 |
$475,000 |
$580,000 |
$625,000 |
$560,000 |
$600,000 |
Conradt is planning to change its credit policies in the coming year. For the first time in its history, the company is offering a 2% discount to customers who pay within 15 days of the invoice date. Based on industry trends, Conradt estimates that this change will result in 50% of credit sales being paid within the discount period; another 15% of sales, within the month of sale (but outside of the discount period); and another 32% of sales, during the month after the sale. An estimated 3% of sales will be uncollectible.
Required:
- Prepare Conradt’s cash receipts budget for the second quarter of the coming year.
- How much the cash will Conradt sacrifice in the second quarter by offering the new discount?
What do you think led Conradt to offer the new discount to customers?
Expert Solution
Solution:
A.Conradt’s cash receipts budget for the second quarter of the coming year:
| Particulars | April | May | June | Bad Debts |
| March Sales | $ 1,85,600 | |||
| April Sales | ||||
| Within Discount Period | $ 3,06,250 | |||
| Outside Discount Period | $ 93,750 | $ 2,00,000 | $ 18,750 | |
| May Sale | ||||
| Within Discount Period | $ 2,74,400 | |||
| Outside Discount Period | $ 84,000 | $ 1,79,200 | $ 16,800 | |
| June Sales | ||||
| Within Discount Period | $ 2,94,000 | |||
| Outside Discount Period | $ 90,000 | $ 18,000 | ||
| Totals | $ 5,85,600 | $ 5,58,400 | $ 5,63,200 | $ 53,550 |
B. Calculation cash will Conradt sacrifice in the second quarter by offering the new discount:
| Particulars | Sales | Collection | Cash Sacrifie |
| April Sales | $ 3,12,500 | $ 3,06,250 | $ 6,250 |
| May Sale | $ 2,80,000 | $ 2,74,400 | $ 5,600 |
| June Sales | $ 3,00,000 | $ 2,94,000 | $ 6,000 |
| Totals | $ 8,92,500 | $ 8,74,650 | $ 17,850 |
Cash Sacrifice : $ 17,850.
C.Conradt may have offered the discount to customers after considering the planning to change its credit policies in the coming year because competitors were doing the same thing and it could be that the company needed to accelerate its cash flows to be able to pay its cash outflows on time.
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