1.

Use of Local Messenger:

Benefit from accelerated collections (P500 x 4,240 x 25% x 2 x 15%) P 159,000

Messenger costs (20,000)
Net Advantage P 139,000

2. Use of messenger and lock-box system:

Benefit from accelerated collection (P500 x 4,240 x 25% x 5 x 15%) P 397,500

Cost of combined services [P230,000 + (15,000 x 15%)] 232,250
Net advantage of the combined services P 165,250

• OTHER WAY OF SOLVING

Current Situation:
Days due to late payments: 2
Days due to mailing: 1.5
Days due to processing 3
Total 6.5
Gross Revenue (daily) = 500 * .25 * 4240 = P 530,000

Proposal 1:

Change in COSTS
Cost: P20,000

Change in BENEFIT
Savings in days: 2

Revenue x Days Saved x Opportunity Percentage

500 x .25 x 4240 =530,000
530,000 x 2 x .15 = P159,000
NET change = 159,000 – 20,000 = P 139,000

Proposal 1:

Change in COSTS
Cost: Messenger Service Cost: P230,000
OC of Compensating Balance: (15,000 x 15 %) 2,250
TOTAL P232,250

Change in BENEFIT
Savings in days: 5

Revenue x Days Saved x Opportunity Percentage

500 x .25 x 4240 =530,000
530,000 x 5 x .15 = P397,500
NET change = 397,500 – 232,250= P 165,250
3. Curtis Toy Manufacturing Company
1. Yes, extend credit to these customers as 43.5% incremental return is greater than 14.5%.
Added sales...........................................................$240,000
Accounts uncollectible (12% of new sales)............28,800
Annual incremental revenue..................................211,200
Collection costs.....................................................21,000
Production and selling costs (72% of new sales)....172,800
Annual income before taxes...................................17,400
Taxes (30%)..........................................................5,220
Incremental income after taxes..............................$ 12,180
$240,000
Receivable turnover= 6.0 x 6.0
= 40,000 in new receivables
=$12,180
Return on incremental investment $40,000
= 30.45%
2. Yes, extend credit.
Added sales.........................................................$240,000
Accounts uncollectible (14% of new sales).........–33,600
Annual incremental revenue................................$206,400
Collection costs...................................................–21,000
Production and selling costs (72% of new sales).–172,800
Annual income before taxes................................$12,600
Taxes (30%)........................................................–3,780
Incremental income after taxes………………………..8,820

3. If the receivable turnover drops to 1.5 times, the investment in accounts receivable would
equal P240,000/1.5 = P160,000. The return on incremental investment, assuming a 12%
uncollectible rate, is 7.61%. The credit should not be extended. 7.61% is less than the desired
10%.
12,180
Return on incremental investment= --------------
160,000
= 7.61%

The credit should not be extended. 7.61% is less than the desired 10%.