Logan Distributing Company of Atlanta sells fans and

heaters to
Logan Distributing Company of Atlanta sells fans and heaters to retail outlets throughout the
Southeast. Joe Logan, the president of the company, is thinking about changing the firm’s
credit policy to attract customers away from competitors. The present policy calls for a 1/10, net
30cash discount. The new policy would call for a 3/10, net 50cash discount. Currently, 30
percent of Logan customers are taking the discount, and it is anticipated that this number would
go up to 50 percent with the new discount policy. It is further anticipated that annual sales would
increase from a level of $400,000 to $600,000 as a result of the change in the cash discount
policy. The increased sales would also affect the inventory level. The average inventory carried
by Logan is based on a determination of an EOQ. Assume sales of fans and heaters increase
from 15,000 to 22,500 units. The ordering cost for each order is $200 and the carrying cost per
unit is $1.50 (these values will not change with the discount). The average inventory is based on
EOQ/2. Each unit in inventory has an average cost of $12.Cost of goods sold is equal to 65
percent of net sales; general and administrative expenses are 15 percent of net sales, and
interest payments of 14 percent will only be necessary for the increase in the accounts
receivable and inventory balances. Taxes will be 40 percent of before-tax income.a. Compute
the accounts receivable balance before and after the change in the cash discount policy. Use
the net sales (total sales minus cash discounts) to determine the average daily sales.b.
Determine EOQ before and after the change in the cash discount policy. Translate this into
average inventory (in units and dollars) before and after the change in the cash discount
policy.c. Complete the following income statementd. Should the new cash discount policy be
utilized? Brieflycomment. View Solution: Logan Distributing Company of Atlanta sells fans and
heaters to
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