The Russ Fogler Company has hired your consulting firm to evaluate their receivables management system. They would like you to analyze...

The Russ Fogler Company has hired your consulting firm to evaluate their

receivables management system. They would like you to analyze their receivables situation for

the first year as well as for the first two quarters in business, including DSO’s, aging schedules

and uncollected balances schedules. In addition, Mr. Fogler has expressed concern about some

receivables issues. He is concerned that the tight credit market will affect their ability to

finance receivables with notes payables and wants to determine how much of the receivables

need to be financed.

The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on

October 1, 2013. Its credit sales for the first 6 months of operations were as follows:

Month   Credit Sales

October    $50,000

November   100,000

December    105,000

January    120,000

February    140,000

March    160,000

1. Based on the pro forma financials, Fogler’s total sales forecast for the first full year of

operations is 28,000 phones at an average sales price of $50 per phone. As a first

approximation, they assumed that 20 percent of the firm’s customers will pay 10 days after

the sale, 60 percent will pay on the 30th day, and 20 percent will pay on the 60th day.

a. What is the firm’s projected days sales outstanding (DSO)?

b. What are the projected average daily sales? (Use a 365-day year.)

c. What is Fogler’s projected average receivables level?

d. If Fogler is estimating a gross profit margin, or contribution margin, of 40 percent, how

much of the receivables balance must actually be financed? What would Fogler’s

balance sheet figures for accounts receivable, notes payable and retained earnings be at

the end of the year if notes payable are used to finance the investment in receivables?

e. If short-term bank loans cost 9 percent, what is their projected annual cost of carrying

the receivables?

2. Fogler would like you to determine and explain the primary factors that influence the level

of receivables outstanding. Additionally, they would like to know what factors influence

the dollar cost of carrying the receivables.3. Throughout the first six months of business, the firm’s credit customers maintained

constant payment patterns: 20% paid in the month of sale, 40% paid in the month

following the sale, and 40% paid in the second month following the sale. Refer to the

monthly sales in the table above.

a. What was Fogler’s receivables balance at the end of December and at the end of

March?

b. Assume 90 days per calendar quarter. What were the average daily sales (ADS) and

days sales outstanding (DSO) for the last quarter of 2013 and first quarter of 2014?

What were the ADS and DSO for the first six months of business?

c. Does the DSO indicate that the firm’s customers have changed their payment behavior

from the last quarter of 2013 to the first quarter of 2014? Is DSO a good management

tool in this situation? Why or why not?

d. How does this actual DSO compare to what Fogler anticipated based on approximations

for the year from part 1.a. above? Why did this happen and what can Fogler do to

improve their actual DSO?

4. Fogler would like to see the aging and uncollected balances schedules and compare their

results in order to evaluate customer payment patterns.

a. Construct aging schedules as of the end of December and the end of March.

b. Explain what these aging schedules indicate about the customers’ payment patterns

from one quarter to the next.

c. Construct the uncollected balances schedule as of the end of December and the end of

March.

d. Explain what these uncollected balances schedules indicate about the customers’

payment patterns from one quarter to the next.

e. Which of these schedules properly measures customers’ payment patterns? If you

needed to choose one number to monitor from either the aging or uncollected balances

schedules, which number would best describe the customer payment patterns? Explain

your answers.